Green Bonds - CFA Society Boston Insight_Green Bonds...OCTOBER 2014 2 The green bonds market has...

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GreenBonds:the future ofsustainabilityfinancing

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Contents Page


OCTOBER 2014

Bank of America Merrill Lynch: The coming of green bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

TIAA-CREF Asset Management: The future of green bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

SEB: What is a green bond? and why does it work? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

European Investment Bank: Green bonds - the role of public finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Skanska Financial Services: Skanska Green Bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

oekom research: Corporate green bonds: challenges for a real contribution to sustainability . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Climate Bonds Initiative: How standardization can help ensure that the green bonds market delivers on its potential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Vigeo: Drawing the line: why second party opinion and verification provide an important and useful guiding line for the success of the burgeoning green bond market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Sustainalytics: Key considerations for navigating green bond issuances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

MSCI/Barclays: Catalyzing change Defining a benchmark index for the green bond market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Bloomberg New Energy Finance: Growth of the project bond market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Länsförsäkringar AB: Green bonds are great investments but be aware of green washing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Actiam: The climate bonds market in need of standards – maybe even a small range of them? . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

ICMA: The Green Bonds Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Green Bond Underwriter League Tables 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Largest green bond issuers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

Forthcoming RI Insights:

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Institutional investors around the world are increasingly integrating ESG factors into their fiduciary oversight of assets and their financial strategies in key decision areas such as investment research, risk budgeting, asset allocation, stock selection, mandates and manager monitoring.

is the educational guide which enables those institutional investors to understand how this influences and impacts their business - it gets to the heart of what institutional investment professionals need to know.

is the ideal thought leadership platform for service providers toposition their brand and sustainable investment expertise. Contribute an article towards one of our three forthcoming reports: Emerging Markets, Private Equity, Green Real Estate.

OCTOBER 2014

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The green bonds market has been anincredible success in a short space of time.This is testament, we believe, to three mainfeatures.

The first is the simplicity of the green bondsconcept in hypothecating loans towardsenvironmental or sustainability-orientatedprojects within an existing, highlydeveloped financial market structure.

The second is the ability of the bond markets - and the actors withinthe market - to act as a rapid financing stream when the product isright and the terms even with existing loan paper.

The third, and certainly not the least, is the determination and gusto ofan initially small, but growing band of dedicated supporters - many ofwhom are featured in this publication – to promote and drive forwardthat market. One of those is associated with producing this report: theClimate Bonds Initiative (CBI), which has been at the front ofencouraging interest and overseeing environmental quality. The CBI’sinvolvement has been especially important in galvanizing supportwithin the responsible investment community that has been amongthe major buyers of green bonds since they first came to market. Thatfinancial backing by responsible investors also needs to be saluted.

On a personal basis, it is particularly satisfying to have tracked thismarket since its inception back in 2007/8 – from the beginnings ofResponsible Investor as a publication – and to have covered itsemergence from baby to adolescent steps; overcoming initialscepticism from many. The multilateral institutions – notably the WorldBank - and the investment banks that have backed the concept withproduct and sales dynamism have been potent in their efforts. As havethe organisations that incubated discussion and development on greenbonds, and the corporate issuers that have deepened the market.

Predictions are that the international green bonds market could rise to

$100bn by the time of next year’s United Nations conference onclimate change in Paris. Showing that kind of a growth spurt, greenbonds will be firmly on the political agenda of attending governmentsby the time Paris comes around, and support should rise dramatically.If governments step into the green bond space in a big way viaissuance and tax incentives the development possibilities could behuge. Cities and regions are already looking closely at how they canfinance infrastructure such as environmentally friendly transportationvia green bonds.

But, as with all fledgling markets, it takes time to hone the rules,particularly in a hotly debated field such as environmental impact. Thisreport looks at the initiatives that are taking place to put standardsaround green bonds to ensure they don’t fall foul of damagingaccusations of greenwashing or opacity, some of which have alreadybeen aired.

We’ve tried to make this report as comprehensive as possible, both forreaders who may be relatively new to the asset type, and those whowant to understand where the latest discussions are at on standards,use of proceeds, verification/reporting and public/governmentunderstanding and adoption.

Getting these key, outstanding questions answered and broadlyaccepted will be vital to continued development.

If they are, then all the ingredients are there for a truly influential,environmentally orientated debt market: large developmentorganizations, corporate green bond issuance, keen investors (notablythose with RI/sustainability interest), interest rates akin to traditionalpaper, government interest and green/sustainable credentials!

We hope this report is a valuable snapshot of the rise of green bondsfrom birth to maturity.

Hugh Wheelan, Managing Editor

Response Global Media LtdManaging EditorHugh WheelanTel: +44 (0) 20 3640 9153Email: [email protected]

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GREENBONDSThe future ofsustainabilityfinancing


In association with:

Lead Sponsor:

Green Bonds: the future of sustainability financing

Green Bonds

Transparency Open communication

Traceability Earmarking of proceeds

Governance Good governance and high standards for projects

Vetting of Green Verification of the Green Framework

Following the key principle of

Simplicity

A concept developed with investors for investors aiming to establish

a transparent and prudent way for mainstream financial mandates to

participate in climate financing.

As the underwriter of the first World Bank Green Bonds in 2008 and

the market leader, SEB is committed to continue our dedicated work

in close cooperation with investors and issuers to obtain:

For further informationseb.se/greenbonds

Bloomberg SRIB

This is for information purposes only

OCTOBER 2014

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At Bank of America Merrill Lynch, we haveoften said that the “environment” sits atthe inflection point between business and

corporate social responsibility. It is where therubber hits the road in terms of focusing financeon externalities. For the debt markets, greenbonds are a perfect example of such an inflection point.

In the last six months, we have seen more greenbonds issued than in the previous six years, with morethan $20 billion of new transactions taking place this year.Significant momentum is developing, driven by acombination of overlapping factors that are just beginningto transform the narrative around green investing.

The seeds were sown a few years ago by someleading multilateral development banks, which, to theircredit, wanted to build a market for environmentally

focused bonds. However, it is probablythe human ingredient - the desire tocompete - which has catalyzed thisgrowth. Investors compete to havemore environment social andgovernance (“ESG”) money undermanagement. Issuers compete to bethe first to market, to highlight andimprove their green credentials, and to

issue larger bonds to fund more green projects. The bankscompete to see who can bring more green bonds tomarket. The race is on.

However, as we round the bend and look down thenext stretch of road, we see a row of hurdles marked withbold lettering asking: “What is green?” and “Who decideswhat is green?” As the market continues to grow, we willcontinually seek to address and surmount these hurdles.

It’s up to all market players to decide for ourselveshow hard we will train for the race and how muchresearch we will do to understand the nuances of themarket and formulate our own opinions. There is not likelyto ever be a singular green authority given the diversity ofinvestors interested in buying green bonds and the sheerrange of industries with interest in issuing them. Even theorganizations that seek to evaluate “greenness” are diversein their approach and opinion. But diversity makes aspecies robust; and multiple competing approaches makea market efficient.

Suzanne Buchta, Managing Director, Debt Capital Markets, Bank of America Merrill Lynch

The coming ofgreen bonds...

“Even the organizationsthat seek to evaluate“greenness” are diversein their approach andopinion ”

OCTOBER 2014

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Recognizing the low likelihood that consensus will beachieved regarding which project categories qualify asgreen, but understanding the urgency of mobilizinginvestment dollars towards environmentally sustainableprojects, Bank of America Merrill Lynch and Citi consultedwith numerous European and U.S. investors and priorissuers of green bonds in 2013 and published the GreenBond Framework to provide a roadmap for disclosure andreporting. The Framework, which also includes anappendix of references from contemporary environmentalexperts, provides a platform to overcome the first hurdleof “what is green”.

Moving forward, with additional input from amultitude of supranationals and extensive help fromCredit Agricole and JPMorgan, the Framework wasrepublished in January 2014 as the Green BondPrinciples, providing potential green bond issuers withfour key pillars to follow. These four pillars describe the

disclosure, internal process and public reporting thatinvestors expect of green bonds. Now fully establishedindustry-wide issuance guidelines, the Green BondPrinciples are rapidly becoming a keyfoundation for the continued growth ofthe market. A current membership bodynow exists with 55 investors, issuers andunderwriters, and 18 observers toprovide feedback on the Principles. TheInternational Capital Markets Association(“ICMA”) has been named as Secretariatto aggregate feedback for review anddiscussion. We leap another hurdle.

With each barrier surmounted, thesuccess of the green bond marketgathers attention and new voices ask: “Is it green?” Thisquestion is layered and nuanced. We consider thisquestion in “Is it green?” Layers 1-5, below.

“With each barriersurmounted, thesuccess of the greenbond market gathersattention and newvoices ask: “Is itgreen?” ”

“Is it green?” layer 1:

The issuer has listed several categories of “eligible green projects” in its pricing supplement.Are all those categories really green?

Ultimately it is the investors’ decision on whether the categories addressed in the ‘Use of Proceeds’ are “green”. Opinionswill likely differ from investment house to investment house. However, given the disclosure in the Use of Proceeds sectionof the bond’s official documents, each investing house can read the disclosure and decide for themselves.

For example, the Export-Import Bank of Korea (KEXIM), Iberdrola International B.V. (Iberdrola) and GDF Suez listhydro as a category. All three of these issuers provide optional additional assurance in the form of second-party opinions(KEXIM’s from CICERO, Iberdrola’s and GDF Suez’s from Vigeo). But is large-scale hydro really green? Some greeninvestors would argue that it is; some, that it’s not. However, thanks to the Use of Proceeds disclosure (Pillar #1 of theGreen Bond Principles), the investor can see hydro as a category and decide for themselves whether to invest.

Another example, U.S.-based Regency Centres Corp lists construction of LEED-certified buildings as a category. Somecommentators have described LEED-certified building construction as “pale green” for Use of Proceeds even though only40% of new U.S. buildings are built to this energy efficiency and environmental design standard (for shopping centers,that 40% statistic drops even lower, making the hurdle for achieving LEED certification even higher). A number of activegreen-focused investors participated in Regency’s recent green bond issue, the first by a US Real Estate Investment Trust(REIT) because they recognized the environmental rigor in the LEED third party standard and this Use of Proceeds,disclosed in the document, satisfied their internal green criteria for investing.

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Evolution of the Green Bond Market

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“Is it green?” Layer 3:

Will the issuer actually report to the public on which projects received the proceeds?

Investors are choosing to target this sector because they want to see that their funds are driving environmental impact.This area is covered by the Pillar 4 of the Green Bond Principles, and most issuers of Use of Proceeds agree at the time ofpricing to provide follow-on reporting either via a section on the issuer’s website, in it’s Sustainability Report, or throughan investor newsletter. Some issuers, like the European Investment Bank, the World Bank, the International FinanceCorporation, and Bank of America Corp, have already created sections on their websites to report on the projectsreceiving proceeds from their Green Bonds. Others are likely to follow, but many of the bonds are still too new for thefirst annual reporting anniversary date.


Does the issuer have a second party opinion?

While outside of the four pillars of the Green Bond Principles’, second-party opinions are highlighted as a type of optional“additional assurance.” So far, a number of organizations have stepped up to provide second-party opinions. All second-party opinion providers currently deliver their opinion once, before an issuer embarks on a program of issuing greenbonds. To date, they have not provided opinions on a bond-by-bond basis. Consequently, the assurance is less about thegreenness of the individual bonds and the projects that receive funding from those bonds and more about the processthe issuer plans to use to select projects for the specific green categories it has chosen. Sometimes, the second-partyopinion provider also gives an opinion on whether or not those categories are green, dark green, pale green or notgreen. These opinion providers vary significantly in their process and approach, but competing approaches can make fora more robust market and provide investors with additional background on the issuers.


Will the issuer really spend the money on green projects? Are the proceeds really “ring-fenced”?

The funds received from Use of Proceeds are not “ring-fenced”, but rather “ear-marked;” that is, tracked internally on thebooks and records of the issuer. The money is fungible and consequently the focus at the time a green bond is broughtto market is on whether the issuer actually has enough green projects (either recently executed or in the pipeline) toconsume the notional of the bond. The issuer should select projects that fall within the categories specified in the Use ofProceeds and track the proceeds allocated to those projects on their internal books and records: pillars 2 and 3 of theGreen Bond Principles.

To provide additional, but optional, assurance, there is value in corporate green bond issuers providing (or promisingto provide) attestation letters from their auditors to demonstrate that the green bond proceeds have been allocated to thetypes of projects the issuer names in the Use of Proceeds section of the official green bond documents. In addition, at leastone second party opinion provider, DNV GL, provides an attestation of the use of funds. These types of assurance can giveinvestors additional comfort and, in the future, could potentially be used as proof of broader third-party verification.

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Suzanne Buchta is a Managing Director in Debt Capital Markets and a 14-year veteran at Bank of America Merrill Lynch. AsGlobal Co-Head of Green Bonds and Market Linked Notes, Suzanne's team works across industry lines to advise CapitalMarkets clients on these types of product specific financings.

Suzanne has been active in advising issuers and consulting investors on Green Bonds since 2010. Her team brought thefirst retail Green Bonds in 2011, held extensive dialogues with Green Bonds investors around the globe, and helped to garnermandates for a broad range of key Green Bond issuances.

Suzanne co-authored, with Citi, a White Paper on the Framework for Green Bonds, published in September 2013, whichhas formed the basis for the “Green Bond Principles” published on January 13, 2014. This paper is quickly becoming arecognized market standard guidance paper for transparency and disclosure for Green Bonds.

In April 2014, Suzanne was a Bloomberg New Energy Finance FiRe Finalist for her intervention on “Catapulting GreenBonds from a Niche Market to a Mainstream Market.” In May 2014, she spoke on Green Bonds at the UN’s Abu DhabiAscent. She has also spoken on Green Bonds at a number of other conferences globally.

Suzanne holds a Masters in Mathematics from UNC Chapel Hill, a Fulbright Fellowship from Melbourne University and aBA from College of the Holy Cross.

The “greenness” discussion will continue to evolve asthe market expands and as new issuers and new investorsenter the market. So far, we have seen fewer than 45issuers. In addition, the geographic spread of issuers hasso far been limited, with the majority of corporateissuance coming from countries in northern Europe andNorth America. Considering the number of companiesglobally that are members of industry organizations whichpromote environmentally responsible business practices –organizations such as the World Council for SustainableBusiness Development or the Global Compact – there ispotential for increased corporate issuance.

There is also potential for increased issuance fromemerging markets entities. While most of the largestmultilateral development banks have begun to issue greenbonds, there is scope for green bond issuance from themany regional and national development banks thatoperate locally in the emerging markets and some of thepoorest economies. This could help accelerate capitalinflows to geographies and sectors where it can be difficultto attract direct private sector investment. In addition, theexpansion of credit enhancement and targeted insuranceproducts will also help attract institutional investment intosectors and geographies that currently struggle to raise thefunds needed to accelerate low carbon investment.

The development of green bond structures thatsupport the aggregation of smaller transactions into asset-backed issuance will give investors access to the risk andperformance of the underlying projects. We have alreadyseen the first green shoots of this market with the ToyotaABS transaction – a “hybrid” of a Use of Proceeds greenbond and a true green ABS where the collateral pool iscomprised of all types of auto loans, but the proceeds areto be used for new auto loans to hybrids and other strictly

high gas efficiency vehicles – and the SolarCity ABS privateplacement where the collateral pool is comprised strictly ofsolar leases, clearly a green bond even without a secondparty opinion, a specialized use of proceeds or a websitereporting process.

The green bond market is still very young. Ultimately,investors will be the final arbiters of what they considergreen enough for them. But all parties – investors, issuers,underwriters, verifiers and other commentators – have arole to play in collaboratively developing the structures,frameworks, guidelines, standards and incentives to allowthe market to develop with integrity. The establishment ofthe Green Bond Principles is one of the first steps increating a forum that promotes such collaboration. Its 55Members seem eager to work together to develop areasonable framework that has integrity and openness andthat promotes transparency and disclosure so thatinvestors can decide for themselves if a given bond isgreen enough for their standards. Above all, the GreenBond Principles encourages the sustainable growth of thisnascent but very important market.


Are bonds issued by a “pure green” company or project or pool of loans automatically green bonds?

The development of the green bond market has the potential to significantly accelerate the flow of investment by pure-play companies and developers into low carbon project finance since it drives investor appetite for this theme. Take, forexample, a solar-lease, asset-backed bond or a project bond to fund transmission lines to connect UK offshore wind tothe UK grid. Consensus would likely point to both projects being considered “green.” These two examples already exist inthe market and are considered green by most if not all investors. The use of proceeds is obvious, the ear-marking of thefunds is obvious, the project reporting requirement becomes moot and second party opinions were not necessary.

EUR $17.8bn 42%

USD $12.1bn 28%

Other $3.7bn 9%

GBP $1.3bn 3%

SEK $4.7bn 11%

AUD $1.9bn 5%

BRL $1.1bn 3%

Currency Breakdown

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The evolution of the green credit market tooktwo important steps forward with the launchof the World Bank Green Bond program

initially and the more recent development of theGreen Bond Principles. Continued evolution of thePrinciples, which focus primarily on the use ofproceeds to identify and define securities,together with increased transparency aroundreporting requirements, should pave the way foradditional types of securities from more issuers inthe green credit space.

Beyond these advances, there is scope for the greencredit market to expand further, in particular throughother types of issues that support environmentalinitiatives and projects. The optimal outcome for greenbonds will be their integration into the investingmainstream, providing investors with the opportunity tofinance environmental impact by investing across a broadspectrum fixed-income instruments and issuers.

I. “Green bond” issuance is rapidly expanding Historically, entities have accessed the bond markets tofund the development of new power plants andenvironmental projects. Today, climate change initiativesand legislation are proving to be a driver of public fixed-income issuance, as bonds are particularly well suited toprovide the capital for long-term environmental projects.Initially, the green credit market was limited to certain

geographies, issuers, issue size, and investment types. Butnow investment banks and issuers are using green bondsas a way to diversify their funding sources. These dealsprovide investors the opportunity to fund environmentalsolutions while realizing competitive returns.

The first “green bond” issued by the World Bank in2008, was driven by investor demand. Subsequentissuance of green bonds was initially the exclusive domainof the multilateral development banks like the World Bankor International Finance Corporation (IFC), but now agrowing variety of issuers are bringing deals to themarket. Within the past 18 months, we have seen anumber of firsts:• the first municipal green bond, issued by

Massachusetts • the first U.S. corporate green bond from Bank of

America• the first asset-backed green bonds from Toyota

Financial Services and Solar City; and • leveraged loan green bonds from Ex-Gen Renewables

and TerraForm Power. As of May 2014, green bond issuance exceeded

estimates and, in fact, exceeded total issuance from theprevious five years.

More and varied institutional investors have shown anappetite for green bonds, and issuers and sponsors haveresponded to the opportunity for a new pool of capital.According to Bloomberg New Energy Finance: “if current

The future of green bonds

Stephen M. Liberatore, CFAManaging Director, Portfolio Manager,Social Choice Bond Portfolios, TIAA-CREF Asset Managment

Co-authors:Amy Muska O’Brien, Managing Director,Head of Responsible Investment, TIAA-CREF Asset ManagmentandChristine Pishko, Director, Client Portfolio Management, TIAA-CREF Asset Managment

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trends are extrapolated for the full year 2014, the globalgreen bond market will be roughly 3.2% of the value theUS corporate bond market, up from 1% in 2013 and0.4% in 2012. 2

II. With such rapid adoption by issuers, theintroduction of guidelines and issuance protocolsare essential to the credibility of a future robustmarket. Recently there has been substantialdevelopment in this area and it continues to evolveand improve. In 2013, the World Bank held a Green Bond Symposium,with the objective of promoting industry dialogue amonginvestors, issuers, and intermediaries to share perspectivesand advance thinking on the evolving green bond market.With so many new participants in this market,establishing guidelines and benchmarks are essential tomaintaining credibility of the “green bond” designation.Moreover, clearly defined parameters provide guidance to

prospective issuers on thecharacteristics needed to satisfyinvestor demand (e.g., the appropriatelevel and quality of subsequentdisclosure related to the use ofproceeds, projects or securitizations).

In January 2014, a group of fourinvestment banks developed and issuedthe Green Bond Principles, with theobjective of providing clarity on theseissues as well as providing guidelines onpractices and procedures for issuingsecurities to improve overalltransparency for green bonds. Theseprinciples, which are voluntary anddesigned to be industry-wide, includeinput from a variety of stakeholders,including issuers, investors, banks, andother intermediaries. Support of theseprinciples has quickly expanded to 25institutions. The principles encourage aninstitution or sponsor to provide a levelof transparency around the use of abond’s proceeds providing an investorthe opportunity to determine if the“green” aspects of the issue are

consistent with their view of green. Specifically, theprinciples define a process for designating, disclosing,managing, and reporting on the proceeds of a green bond.

Despite this progress, the definition of whatconstitutes a green bond is still very broad and largelyundefined. For example, “green” may refer to a variety ofprojects and initiatives relating to “renewable energy,energy efficiency, transport, waste and water reduction,sustainability and adaptation to climate change.” But thisis not a comprehensive list. While the Green BondPrinciples provide guidelines for issuers to disclose howthey apply the “green” criteria, the introduction ofadditional certifications may be beneficial or ultimatelynecessary depending upon the issuer to preserve theintegrity of the “green” classification. Of particular value,and introduced with the issuance of Bank of America’s

green bond, was the inclusion of an auditing process thatserves as third-party documentation for the use-of-proceeds process. Improved disclosure around howproceeds are utilized, along with subsequent informationon environmental impacts is critical to expanding thescope of the market. In addition to providing investors theability to evaluate the impact of their investments, suchdisclosure provides investors who lack expertise in theenvironment or climate change evidence that theinvestment’s environmental attributes align with thegreen bond classification system.

Additionally, the convergence of transparencyrequirements should help prevent potential mislabeling ofissues for the purposes of marketing – a practice knownas “greenwashing” – which could ultimately harm thevalue and credibility of the classification. The objective isto clarify the definitions and process to be as inclusive aspossible, thereby capturing a broad but appropriate arrayof issuer participants who can contribute to building thescope of the market across the yield curve, sectors,maturities, and credit quality.

III. TIAA-CREF Asset Management’s (TCAM) early-market experience with the characterization ofProactive Social Investments both predates thedevelopment of green bonds and expands beyondtheir scope. In 2007, TCAM developed its own proprietary mechanismfor including publicly traded fixed-income instruments thatdirectly support green projects and initiatives. The SocialChoice Bond portfolios seek to identify securities supportingthe development, enhancement, or operations of renewableenergy and environmentally beneficial projects. Investmentsare in issues where the proceeds are directly and measurablytied to socially and/or environmentally beneficial projectssuch as green bonds. The Social Choice Bond portfolioshave invested over $500m to date in issues that meetTCAM’s green bond criteria.

TCAM’s proprietary term for this category ofinvestments is Proactive Social Investments (PSI). Theseare defined as fixed-income investments that providefunding for organizations or projects with direct andmeasurable social and environmental benefits in additionto competitive risk-adjusted returns. The Social ChoiceBond mandates are focused on four thematic areas ofPSI: affordable housing; community and economicdevelopment; renewable energy and climate change; andnatural resources. Green bond issues, as currentlydefined, typically fall within the renewable energy andclimate change theme, although the PSI NaturalResources category may also apply. The categories aredefined overleaf.1. Renewable energy and climate change: securities that

finance new or expand existing renewable energyprojects (including hydroelectric, solar and wind,geothermal, and energy from waste), smart grid andrelated projects designed to make power generationand transmission systems more efficient, and otherenergy efficiency projects that result in a reduction ofgreenhouse gas emissions.

“TIAA-CREF AssetManagement is an earlymarket participant andactive leader in targetingpublic fixed-incomesecurities focused onenvironmental impact,evidenced by ourparticipation on theExecutive Committee for Green Bond Principles,the Ceres Working Groupfor Green Bonds, and ourown innovativeproprietary classificationof Proactive SocialInvestments. This puts usin a unique position tohelp shape the greencredit markets. ”

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2. Natural resources: investments that support landconservation, sustainable forestry and agriculture,remediation and redevelopment of polluted orcontaminated sites, sustainable waste managementprojects, water infrastructure (including improvementof clean drinking water supplies and/or sewersystems), and sustainable building projects.Currently, the defining characteristics of green bonds

according to the Green Bond Principles are the use of thebond’s proceeds. By this definition, there are many moretypes of issues available in the market that supportenvironment and climate change initiatives but currentlylack a green bond label. For example, a corporate bondwhose proceeds support the construction of a solar farm,a CMBS security on a “Platinum” Leadership in Energy andEnvironmental Design (LEED) office building, and a

municipal security that funds aconservation land trust all support theenvironment. Expanding the definitionof the green credit market to includethese types of issues will provide abroader list of issuers from whichintuitions can choose to include in aportfolio with a “green” mandate.

As investors increasingly focus onenvironmentally themed mandates, it isessential that the supply of these issueskeeps up with demand. From a

mainstream investor’s perspective, green bonds should besubject to the same relative value framework as all otherpotential investments. Generating attractive long-termperformance will attract additional capital and allow forthe expansion of environmental investments. A key factorin generating outperformance is establishing and adheringto a robust and dynamic relative value framework.Broadening and diversifying the opportunity set for theseinvestments will help improve liquidity and provideinvestors flexibility to generate outperformance.

Moving forward, issuance of green bonds and thegreen credit market are continuing to evolve and expand,driven largely by investor demand. More issuers, larger and

more liquid opportunities, and expanding opportunitiesacross the yield curve will come to market in the future,facilitated by an acceptance of green guidelines amongissuers. Enhanced reporting requirements and additionaltransparency will be essential both to retaining thecredibility of the “green” classification and to making themarket accessible to a broader set of fixed-income issuersand investors; an outcome that will be beneficial to all.Disclosures:The material is for informational purposes only and should not be regarded as arecommendation or an offer to buy or sell any product or service to which thisinformation may relate. Certain products and services may not be available to allentities or persons.

TIAA-CREF Asset Management provides investment advice and portfoliomanagement services to the TIAA-CREF group of companies through the followingentities: Teachers Advisors, Inc., TIAA-CREF Investment Management, LLC, TIAA-CREF Alternatives Advisors, LLC and Teachers Insurance and Annuity Association®(TIAA®). TIAA-CREF Alternatives Advisors, LLC is a registered investment advisorand wholly owned subsidiary of Teachers Insurance and Annuity Association (TIAA).

Please note SRI strategies are subject to social criteria risk, namely the risk thatbecause social criteria excludes securities of certain issuers for nonfinancial reasons,investors may forgo some market opportunities available to those that don’t usethese criteria.

Stephen M. Liberatore, CFA is a managing director and fixed-income portfolio manager for the TIAA-CREF organization. Mr. Liberatore is the lead portfolio managerfor the organization’s Socially Responsible investment (SRI) fixed income mandates and holds responsibility for investment strategy and securities selection. He joined theTIAA-CREF organization in 2004.

Mr. Liberatore has 18 years of industry experience, including positions at Nationwide Mutual Insurance Co. and Protective Life Corporation, where he was responsiblefor portfolio management, credit research and trading for both total return and liability-driven assets.Mr. Liberatore is considered a subject matter expert on the managementof total return SRI fixed-income portfolios, and he frequently presents at both SRI and fixed-income conferences. His views on developments in these areas have been featuredin numerous industry publications.

Mr. Liberatore is a member of the initial executive committee of the Green Bond Principles and the CERES Green Bond Working Group. Mr. Liberatore holds a B.S. fromthe State University of New York at Buffalo and an MBA in finance and operations from Wake Forest University’s Babcock Graduate School of Management. He holds theChartered Financial Analyst designation and is a member of the CFA Society North Carolina and the CFA Institute

Amy Muska O’Brien is managing director and Head of TIAA-CREF’s Responsible Investment team. She provides overall strategic leadership to Asset Management onthe implementation of TIAA-CREF’s responsible investment commitments and environmental, social and governance (ESG) approaches, including ESG-focused funds, ESGintegration frameworks across asset classes, and the firm’s community and impact investing portfolios.

Ms. O’Brien joined the firm as a Director in 2005 and has worked on a wide range of ESG and community investing initiatives across TIAA-CREF. Ms. O’Brien has 18years of professional experience in the field of socially responsible investing. Prior to joining TIAA-CREF in 2005, Ms. O’Brien served as Director of Corporate SocialResponsibility at the Pension Boards - United Church of Christ, where she developed and implemented socially responsible investment strategies. Previously, she was ResearchManager at the Council on Economic Priorities, the non-profit research firm that pioneered the field of corporate social and environmental responsibility ratings for investorsand consumers.

Ms. O’Brien earned a B.S. in Biology from Boston College and an M.S. in Environmental Management and Policy from Rensselaer Polytechnic Institute. From 2006-2011she served on the Board of Directors of the Social Investment Forum (SIF), a national nonprofit membership association dedicated to advancing investment practices thatconsider environmental, social and corporate governance criteria. In 2008, Ms. O’Brien joined the board of directors of The Investor Responsibility Research Center Institute forCorporate Responsibility (IRRCi), whose mission is to act as a catalyst for thought leaders, and to sponsor research on corporate governance and corporate responsibility. In2011 she was appointed to the Steering Committee of the Global Initiative for Sustainability Ratings. In 2014 she was named to the Principles for Responsible Investment(PRI) Initiative’s Reporting and Assessment Steering Committee.

“Since inception inSeptember 2012, theSocial Choice BondFund allocation togreen bonds has grownand is expected tocontinue to grow ”

30%

25%

20%

15%

10%

5%

0%Q3

2012Q4

2012Q1

2013Q2

2013Q3

2013Q4

2013Q1

2014Q2

2014

Growing allocation to green bonds

Total PSI* allocation withinSocial Choice Bond Fund

* Proactive Social Investments (PSI) is a TIAA-CREF proprietary classification of fixed-incomesecurities. The security descriptions included here are for informational, illustrative purposesonly and should not be views as an endorsement or guarantee of performance.

Renewable Energy & Climate Change+ Natural Resources as % of TotalPSI%

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Importantly, this implies that a Green Bond can bebought by any investor with a fiduciary mandate whootherwise would be able to take risk on the issuer. Wherethe Green Bond changes its character from a “regular”bond is, firstly, in the specification of how the proceedsshall be used - namely for climate related financing –and, secondly, in transparency and reporting.

The birth and the growth of the Green Bond markethas, like any other new development, presented anumber of challenges. The single most importantchallenge has been to identify and share the values of aGreen Bond - what purpose does it have and how does itprovide business value for the stakeholders involved? Sohow have we approached that?

In the way we validate mandates and communicateperformance in financial markets we have created asystem where most values are explained by numbers andconsequently performance needs to be quantifiable.However, when we talk about transitions on a largerscale – such as finding financial resources to alleviateclimate stress - we need to change the financialinfrastructure and organizations to facilitate thetransition. Organisations need to appreciate the newgoals and the infrastructure needs to be able to identifyand support the new objectives. There are various ways

to do this but the most efficient is to leverage existinginfrastructure.

Hence, the nature of the GreenBond is to enable mainstream fixedincome mandates to engage andaccess climate finance. The strength isthat it is enabling and engagingtraditional bond mandates for climatefinance, and thereby activates newpockets of money for Greeninvestments. So we see the mainpurpose of the Green Bond is to beused as an instrument for businessleaders to transform their organizations to be morecomprehensive and address society challenges throughtheir existing infrastructure.

What is agreen bond?

and why does it work?

The financial principle of a Green Bond is very simple - it is just a bond like any other. Thelender takes the same credit risk on the borrower’s repayment capability as in the case of aregular bond and, hence, if the price of the Green Bond is in line with the price where the

issuer normally gets their funding, the risk/return will be in line with “regular” bonds.

Christopher Flensborg, Head of Sustainable Products and Product Development, SEB

“ the nature of the GreenBond is to enablemainstream fixedincome mandates toengage and accessclimate finance ”

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The business value is found through theparticipation in this transition, understanding why ithappens and where it goes, identifying systemic andbusiness stress factors and being well prepared for newvaluations.

There’s been a big debate about standards; doesone size fit all, how dynamic shall these standards be,who will decide and what is their credibility andmotivation? And most importantly, why do we need thestandards, what are they good for? Let’s start with thelast question since it will be difficult to create standardswithout a defined goal.

When looking at standards the key element will beframing the market in respect to rules and procedures.When that is done, various stakeholder groups can use

these frameworks to create their ownuniverse of Green Bonds. Some will bevery green, some will be light green,some will target mainstreammandates, some will target dedicatedGreen mandates. There will, like in allother markets, be a mainstreamsolution and a specialist solution, eachwith their own requirements.

The first step towards creatingthese rules and procedures has alreadybeen taken in the form of the GreenBond Principles which were created by13 banks of which SEB was one, inJanuary this year. The Green Bond

Principles create a common starting point and this willcontinuously be supervised and followed up by theGreen Bond Principle Governance and the secretariatoperated by the International Capital MarketsAssociation, ICMA. This initiative has the potential tocreate and lead the market development of rules andprocedures for Green Bonds.

The privileges we have through our work withvarious blue chip organizations have taught us that thechallenges are not alike. For instance, in Germanyinstitutions like KfW work on multiple tasks to addressclimate protection and the energy transition, in HollandNWB and the water authorities work on managing waterlevels. In Africa, Korea, Canada, Norway and many otherplaces, regional leaders like AfDB, KEXIM, EDC and KBNwork with their individual challenges and on a globallevel the UN and the World Bank Group work in an everchanging environment to aggregate knowledge and tofind and share solutions to climate stress. So, no, onesize doesn't fit all!!

Another important issue is that of what is Green andhow do we define the assets that can be financed byGreen Bonds? Is it up to banks and bureaucrats todefine, is it a business decision or do we need to go toacademia and Non-Governmental Organizations for ananswer? In our opinion, this is a very simple question - itis up to the investor to decide!

However, we need to assess how we - as a serviceinstitution - provide a product which is not only suitablebut also valuable for our investors.

Furthermore, a scalable, uniform, broadly labelledsystemized categorization of Green is required to allowinvestors to create their own strategiesand for the broader financial servicessector to provide solutions.

Normally, this is done throughindexes but these indexes need to bebacked by sufficient volume and aspecification of what is included. Indexes are slowly appearing. The WorldBank is doing a tremendous job inguiding the market, leveraging theirinfrastructure and long experience inmarket development. Also, pioneers likeSEB and CICERO (the Norwegian climatescience organization who is theinstitution that has verified most Green Bond issuers’Green bond frameworks) are working to create a globalnetwork of academic institutions; there are already

“a scalable, uniform,broadly labelledsystemizedcategorization of Green is required toallow investors tocreate their ownstrategies ”

“The Green BondPrinciples create acommon starting pointand this willcontinuously besupervised and followedup by the Green BondPrinciple Governance

”

Howgreen is yourbond?Christa Clapp, CICERO

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universities from Europe, NorthAmerica and Asia in the network.

By developing this platform, wehope to be able to create acomprehensive database which willenable stakeholders to use the rulesand procedures from the Green BondPrinciples, the guidance of the WorldBank and the context of the databaseto create an individual Green universereflecting their specific ambitions,

whether via an index or through a tailored model.Lastly, we have started a close cooperation with

HSBC on a joint terminology for determining how tovalidate and guide new strategies and we invite otherbanks to join in the dialogue.

We think this is a crucial next step in thedevelopment of the Green Bond market. We think it isnot only good business but also a way for us and ourpartners to drive the financial world towards bettersolutions and provide clarity for all to develop andimplement green strategies.

Christopher Flensborg has been active in the financial market since 1988 and is one of the key founders of the Green Bondmarket. Over the last years Christopher has been active in advising a number of financial investors, financial borrowers,governments, international institutions and NGOs on how mainstream money mandates can be activated towards climateinvestments. Christopher Flensborg was awarded “personality of the year” by the Environmental Finance magazine in 2012and has been invited as key note speaker for a number of sessions on climate finance. Christopher is employed by the Swedishbank SEB where he heads the Sustainable Products and Product Development unit.

“we have started a closecooperation with HSBCon a joint terminologyfor determining how tovalidate and guide newstrategies and we inviteother banks to join inthe dialogue ”

With the onset of green bonds, investors have theopportunity to support a low-carbon and climate-resilient future. To date, only a fraction of a percent ofthe global bond market could be considered ‘green’ –but if this portion continues to grow, investments inlow-carbon infrastructure can facilitate the economicrestructuring necessary to meet a 2°C climate changetarget.

Green bonds are a promising new trend in the bondmarket – but the environmental foundation needs to be solidfor the market to realize its full potential. The most criticalchallenge that the growing green bonds market faces isenvironmental integrity.

The financial community is becoming more aware ofenvironmental risks to their investments. Climate change drivesmore extreme weather patterns and events that can pose aphysical risk to assets (e.g. water stress can negatively impactinfrastructure projects). Investors also face an additional policyrisk: impending climate policy could eventually result instranded assets that support fossil fuel infrastructure. Bothphysical and policy risks can translate into real economicimpacts on investments.

Investors should have a full understanding of the potentialenvironmental impacts and risks on their investments. Thisbecomes even more important as the green bond marketshifts towards corporate issuers. Understanding the‘greenness’ of a bond goes beyond transparency on whatproject types a bond invests in, to disclosure of environmentalrisks of investments. The possibility of a ‘headline risk’ from alarge negative environmental impact or disaster poses a risk ofshare price losses to issuers and investors.

Independent environmental reviews of green bondsprovide the necessary due diligence for investors tounderstand the environmental impacts of their financialdecisions. The Green Bond Principles, developed by a

consortium of investment banks, also note that theenvironmental integrity of investments is enhanced by externalexpert reviews.

As an independent, not-for-profit research institute,CICERO provides environmental reviews (called secondopinions) on green bond investment frameworks by applyinghigh-quality climate change research and expertise. Ourresearchers review the issuing institutions' frameworks foreligible project selection and assess the framework’srobustness in meeting the green bond’s environmentalobjectives. In doing so, we emphasise avoiding lock-ins andlong-term irreversible damage to the climate. We alsoemphasise the need for transparent and regular reporting onimpacts of green bond projects to investors.

CICERO has been the leading market provider of greenbond second opinions since the market’s inception in 2007,but we recognize the need to scale-up and broaden ourgeographical reach as the market evolves. CICERO recentlyestablished the Expert Network on Second Opinions (ENSO), aglobal network of trusted research institutions on climatechange and other environmental issues, covering a range oftechnical expertise and regional experience. Building on thetrusted CICERO approach, ENSO will offer a one-stop windowfor second opinions to the financial market operatingindependently from the financial sector and other stakeholdersto preserve the unbiased nature and high quality of secondopinions.

As climate change impacts become a reality, andtransparency on environmental impacts increases, investorsshould look for independent reviews as a sign ofenvironmental due diligence on green bonds. Investors needfull disclosure of risk before they can make informedinvestment decisions. As the market continues to grow andevolve, both investors and the environment would benefitfrom a standard practice to ensure the ‘greenness’ of bonds.

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Green bond market origins – supranationalcatalysts and benchmarksThe inception of an active green bond market wascatalyzed by multilateral development banks (MDBs).They were responding to climate policy imperatives andthe need to scale up market involvement. Financing forclimate action projects was gaining momentum, but the

shortage of market financing for theenormous global climate challenge ledMDBs to promote capital marketsolutions and awareness.

The EIB is particularly attentive tothe meaning of public policies forcapital markets. When in March 2007the EU-Council adopted an ambitiousAction Plan for a sustainable integratedEuropean climate and energy policy,EIB was already working on a greenbond pilot.

In July 2007, EIB launched themarket’s first green bond with

transparent use of proceeds, including audited reporting.It was branded a “Climate Awareness Bond” (CAB). Atthe time EIB explained: “The EU has taken a leading rolein tackling climate change. With this bond EIB is invitinginvestors and the banking community to join thatendeavour, further highlighting EIB’s commitment topromoting EU objectives”.

As the green bond market took shape, public sectorissuers set the pace. However, for roughly five yearsfollowing EIB’s initial issue in 2007, during the depths ofthe financial crisis, the market was limited. Issuance wasdominated by small transactions in niche currencies bymultilateral development banks. Nonetheless, publicsector issuers used this time to develop and raiseawareness about standards.

Public sector issuers developed the popularity of ameanwhile familiar green bond model, with clearsegregation of funds and transparent reporting on use ofproceeds for green investment. As such, they werepioneers of accountability. This helped to address duediligence requirements of investors and generally cementconfidence in a fledgling market.

As advocates and users of high and transparentenvironmental standards, leading supranational banks,agencies and other public institutions were in a positionto provide a credible reference point for the market.

Investors were informed by their experience of SRI inequities. This led some investors to also take intoconsideration the overall environmental,and potentially also social andgovernance credentials of issuers, whenconsidering an investment. Public sectorissuers offered high standards in theseareas, including the focal area ofenvironment. As the EU’s bank, the EIBproactively adheres to EU environmentalregulations, applying environmental considerations to allits projects, not only environmentally focused projects.

The public financial institutions continue to innovateand set precedents. EIB has shown leadership byincorporating an economic price of carbon, and one thatincentivizes green investments, into the assessment of itsprojects.

More recently public finance has added value formarket development by helping generate critical mass ingreen bond deal-flow, including delivery of liquidity.Together with the provision of models for transparencyand integrity, public sector issuers have helped give theGreen Bond market the strong momentum and positivenarrative that it now enjoys. This narrative presentsclimate solutions as established investment opportunities.

Greenbonds - the role ofpublic finance

Bertrand de Mazières, Director General,Finance, European Investment Bank

“The EU has taken aleading role in tackling climatechange. With this bond EIB is invitinginvestors and thebanking community to join that endeavour . . . ”

“As the EU’s bank, theEIB proactively adheresto EU environmentalregulations ”

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Climate change - a defining challenge The most prominent global environmental challenge ofour time is climate change. Energy-related emissions are acentral driver of global warming, and so a key focus ofclimate action. This has been reflected in the dominanceof energy-related climate investments as beneficiaries of

green bond issuance. For EIB, climateaction projects in renewable energy andenergy efficiency have been theexclusive beneficiaries of proceeds fromEIB Climate Awareness Bonds.

It remains a significant challenge tosecure an adequate and equitabledistribution of efforts to meet theglobal emission pathway to a 2°Cscenario. To have an 80 percent chanceof maintaining this 2°C limit, the IEAestimates1 an additional $36 trillion in

clean energy investment is needed through 2050 – or anaverage of $1 trillion more per year compared to a“business as usual” scenario over the next 36 years.

Given the huge additional volumes required, it is clearthat mobilisation of long-term capital at scale is going todepend on engaging institutional investors, who betweenthem own a pool of capital estimated at USD80 trillion.Institutional investors have, relative to their size, hadlimited exposure to low carbon assets. Green bonds arean essential tool in furthering their involvement.

In geographic terms, the European Commissionrecently argued that: ‘’we will need to move beyond the North-South paradigm, reflecting the world in the1990s, towards one based on mutual interdependenceand shared responsibility’’2. Any suitable climateagreement at the UNFCCC conference in Paris inDecember 2015 will need to attractparticipation from all major economies.

Furthermore, engaging the privatesector is a precondition for the requiredscale of mitigation investment – publicmoney alone is far from sufficient. Publicfinanciers such as EIB can add value byhelping to bridge financing gaps andattracting other investors to strategicallyimportant areas.

The EIB therefore promotes low-carbon and climate resilient growthequally inside and outside the EU, and supports both thepublic and private sectors in achieving their climate goals.The EIB’s lending and technical advisory services arehelping to bridge financing gaps and attract otherinvestors to strategically important sectors such asinfrastructure development, innovation and small andmedium-sized enterprises. EIB’s active role in the greenbond market underlines the engagement with the crucialinstitutional investor audience.

“ the IEA estimates anadditional $36 trillionin clean energyinvestment is neededthrough 2050 — or anaverage of $1 trillionmore per year ”

“The European Investment Bank is committed to supporting long-term investmentthat reduces carbon emissions and improves the environment. The EU bank has aunique experience of evaluating and financing green investment both acrossEurope and around the world that benefits projects we work with. We recognise the strong investor interest in our Climate Awareness Bonds andlook forward to further developing the instrument to allow investors targetedinvestment in climate related projects.”

Jonathan Taylor, European Investment Bank Vice PresidentResponsible for Environment and Climate Action

An important indicator of progress in climate finance isthe volume of clean energy investment. This has declined globally by 20% over the last two years.This underlines the need for concerted action.

Source: Bloomberg New Energy Finance

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

$55bn$80bn

$116bn

$167bn

$195bn $196bn

$262bn

$318bn

$289bn

$245bn

46%

45%

44%

17%0.6%

34%

21%-9%

-12%

Clean Energy Investments 2004-2013

“engaging the privatesector is a preconditionfor the required scaleof mitigationinvestment – publicmoney alone is far from sufficient ”

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State of the market – focus on public sector issuersThe green bond market started gaining substantialtraction in 2013, as a range of sizeable institutionalinvestors started voicing the need for liquidity in thesegment.

Growth was driven by landmark issuance in 2013 bythe IFC ($1bn) and EIB (EUR 650m, later increased to EUR2.6bn, making it the largest bond in the market at endH1 2014). The first large corporate green bond also camein 2013 from EDF, for EUR 1.4bn. This piqued the interestof issuers, underwriters and investors interested inbenchmark sized product.

The Green Bonds market had $35.8bn outstanding inmid-2014 (10 June), with issuance burgeoning in 2013($11bn) and 2014 ($18.3bn). So, issuance in just 18months accounted for over 80% of the totaloutstandings. (source: Climate Bond Initiative).

Since the first green bond issue back in 2007, thepublic sector, notably the supranationals, led the segmentin terms of volume through 2013. That changed this year -private sector borrowers currently account for around halfof the market, mostly thanks to the surge in corporateissuance. The growth in issuance by other players in 2013-14 has leveraged models for use of proceeds andreporting that supranationals helped to popularize.

To date, public sector environmental-themed bondissuance has reached almost USD27bn3, ranging across

the supranational, agency and local authority bonds. Sofar, supras, with over USD 20bn, have accounted for thebulk of public sector environmental-themed bondissuance. Supranational issuance typically accounted forover half the market’s annual flows until last year. EIB,IBRD and IFC have been the largest public issuers. EIBaccounts for over 35% of total supraissuance and has been the market’slargest issuer in H1 2014.

2013 and 2014 saw the issuance ofgreen city and muni bonds, as well ascorporates. These are important area for future growth. Cities and sub-sovereign entities (also in emergingmarkets) raise finance to meet climateinfrastructure requirements. In thecorporate space, as reported byBloomberg Energy Finance, over USD9.7bn has been issued until June 2014,by 12 entities in Europe and the UnitedStates, including a EUR 2.5bn placed in 2 tranches by GDF Suez.Three government authorities first came tothe market in 2013: City of Gothenburg in Sweden,together with two regional German banks. The secondbond by Ile de France - governing authority of Paris and its environs - came in April 2014. This year other entrants include, the County of Stockholm and City of Johannesburg.

Agency 15%

Supra 77%Local authority 8%

Public sector environmental-themedbond issuance Total: USD 27bn*

*Source: Crédit Agricole, as of 8th July 2014

“ to date, public sectorenvironmental-themedbond issuance hasreached almostUSD27bn, rangingacross the supranational,agency and localauthority bonds ”

NGO opinion: The public sector has three key roles in the green bond market (Climate Bond Initiative)

• Kick-starting markets with cornerstone issuance, for example through development banks.

• Risk-bridging activities: Given the novelty, scale and policy risk involved in growing low-carbon solutions,public sector support is needed to lift investment ratings to levels that are attractive to investors. This willinclude guarantees, credit enhancement, subsidies and tax incentives.

• Planning and regulatory steps are required to support the generation of investment opportunities. Mostinvestment will depend on enabling and supportive policy and regulation ranging from energy marketmanagement to financial regulation.

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Market outlook – public sector angleMarket momentum is now considerable. While theprivate sector has rightfully started to lead in terms ofvolume, public sector issuers retain a significant role inthis segment - promoting high standards of integrity andtransparency; augmenting liquidity; as well as raising

awareness among market participants.An important challenge will be to

maintain quality and investorconfidence. A useful step forward inthis regard, was the publication in early2014 of the Green Bond Principles(GBPs), founded by a group ofinvestment banks in collaboration withother market participants, includingEIB. This has provided a governanceplatform, helping to bring clarity onthe types of product and practicefinding acceptance in the market, whilesupporting quality and integrity.Founding members of the ExecutiveCommittee leading the application ofthe GBPs include public sector issuers,

such as EIB, underlining the public sector’s continuedcommitment to the development of the market.

A series of factors are likely to make issuers’ overallenvironmental credentials increasingly important. Certaininvestors are looking not only at the green credentials ofprojects linked to a green bond, but also placingincreased emphasis on overall environmental credentialsof the issuer. This is in part driven by concerns aboutreputational risk. Also, following the example offered byequities, some market participants look for ways to assessthe relative green merits of generic bonds, by assessingthe environmental merits of issuers. This has the merit ofgreatly widening the range of available investments, evenif it does not guarantee proceeds used purely for greenpurposes. Also, some issuers may eventually run short ofgreen assets against which to issue green bonds, or prefernot to segregate assets for ALM reasons – leading issuersto promote the environmental merits of their standardbonds. However, obtaining adequate environmentalinformation on the issuer universe, and being able tomake relative judgments, is not yet straightforward.

Greater standardization and quality of reporting is aparticular challenge, and in this regard, multilateraldevelopment banks have been working on a climatefinance tracking methodology. However, the green bondmarket is still in the foothills, and for the market overall(and also EIB) there seems to be no shortage of greenassets to underpin green bond issuance.

Assets behind green bonds – public climate finance Public sector players can be vital for meeting financinggaps or for providing credit enhancement, so as to liftproject quality to a level that other investors canaccommodate. They can also deliver exceptionally longtenors. Nonetheless, public financial firepower is finite, andpublic sector banks find ways of addingvalue in climate projects that are notsimply a matter of financial muscle.

Certain development banks havebuilt a reputation for high qualityfinancial and environmental duediligence, which may not be readilyreplicated in the private sector. Similarly,public banks’ knowledge of the policyand regulatory framework and goodrelations with public authorities can addvalue.

Public actors’ combination ofenvironmental and financing capacityhas often been a crucial trigger forothers to come onboard. It is especiallytrue for more challenging or cutting edge demonstrationprojects. In addition, development banks have beenamong those demonstrating how best to “mainstream”climate action into all business.

Case study – EIB’s Climate Action As the EU bank, the European Investment Bank (EIB) hasput climate action at the top of its agenda. Fightingclimate change is a transversal policy goal of the EIB aspart of its support for sustainable development. In doingso, EIB fosters growth, employment and competitiveness,in a way that promotes economic and social cohesion.

Among MDBs, EIB is the largest provider of climate

“A useful step forwardin this regard, was thepublication in early2014 of the GreenBond Principles (GBPs), founded by a group of investmentbanks in collaborationwith other marketparticipants, including EIB ”

“Among multilateraldevelopment banks, EIBis the largest providerof climate finance, . . .It has financed low-carbon and climate-resilient growth in over160 countries aroundthe world, includingemerging anddeveloping regions. ”

EIB builds out green bond yield curve

The meaningful development of the Green Bond market requires the build-up of a reference curve and thediversification of the investor base. In EUR, EIB’s green benchmarks are issued in ECoop format, whichforesees a size of at least EUR 500m and EUR 250m minimum re-openings upon actual demand.In July 2013, EIB launched a EUR 650m ECoop CAB due 11/2019. Meanwhile increased to EUR 2.6bn, thisissue is currently the largest Green Bond outstanding in any currency. In September 2014, EIB created a second reference on its curve with a EUR 500m CAB due November2026. The issue is the first to extend the benchmark approach to maturities beyond ten years, in line withthe duration of the eligible Renewable Energy and Energy Efficiency projects. In spite of the low level of interest rates, the bond generated strong demand from a range of Europeaninvestors genuinely interested in the socially responsible features of the transaction. Fund managersaccounted for over 63% of distribution.

Eila Kreivi, Head of Capital Markets Department at the EIB, commented: “The CAB 2026, which has brought total CAB issuance toover EUR 6bn ahead of the UNSG Climate Summit, will be increased strategically to meet actual investor demand”.

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finance, lending EUR19bn in 2013, exceeding the targetof 25% of annual lending. It has financed low-carbon andclimate-resilient growth in over 160 countries around theworld, including emerging and developing regions.

EIB encourages others to match its long-terminvestment – on average EIB finances around a third ofeach of its projects, although for climate action the EIBshare can go higher, in more challenging cases. Buildingon over fifty years’ experience and know-how, the Bankcomplements traditional lending with innovative financialproducts and a range of technical assistance tools. It also

leverages its impact by blending with public funds. The Bank has introduced a clear set of definitions as

to which projects could be recorded against the target.This covers both projects designed to avoid greenhousegas emissions (mitigation) as well as to increase theresilience of projects to climate change (adaptation).

A very significant part of the Bank’s activity involvesthe direct creation of long-term tangible assets in capitalintensive parts of the economy (energy, transport,industry) – or R&D and innovation that will shape futureasset creation.

Examples of Innovative climate finance from EIB

Equity funds. The investments in equity funds are an efficient use of EIB capital through a catalytic effect. An EIB investmenttypically provides a "seal of approval" and helps the manager to raise additional public and private capital. To date, EIB hasinvested more than EUR 500m in 19 climate-related infrastructure funds in a diverse range of sectors including renewableenergy, energy efficiency, forestry, land decontamination and biodiversity. The total commitment to these funds is EUR 4bn.This represents a catalytic effect for the EIB investment of 6.5x. The multiplier effect, which is the ratio of total investmentsupported at final project level to the EIB’s commitment, is 26.1x or more than EUR 13bn.

Layered risk funds. Layered-risk funds allow the issuance of different tranches of capital in the form of shares and notes tooffer investors different risk-return profiles, via a public-private partnership. Typically, the EIB acts as a cornerstone investorand sponsor, and structures the fund around public resources targeting a specific policy outcome, such as extending financialcoverage to new and/or under-banked markets, or to demonstrate innovative financial structures. For example, GGF is thefirst specialised fund to advance energy efficiency and renewable energy in South-Eastern Europe and EasternNeighbourhood regions. Initiated by the EIB and KfW Entwicklungsbank, GGF was established to reduce energy consumptionand CO2 emissions.

Credit enhancement. To address the need for investment in large EU infrastructure projects, the Project Bond Initiative aimsto provide partial credit enhancement to projects in order to attract capital market investors. It is based on a risk-sharingprogramme with the EC, which provides a first loss piece. A climate-relevant example is the support for the UK offshoretransmission link to the Greater Gabbard wind farm, where the credit enhancement lifted the rating to A3, making itattractive to a wider range of institutional investors.

1 International Energy Agency (IEA), Energy Technology Perspectives 2012: Pathways to a Clean Energy System, (Paris: OECD/IEA, 2012), 1,http://www.iea.org/Textbase/npsum/ETP2012SUM.pdf

2 European Commission: “The 2015 International Climate Change Agreement: Shaping international climate policy beyond 2020. Consultative Communication”3 Source: market data collected by Credit Agricole, as of 8 July 2014

After earning degrees in business (Ecole des Hautes Etudes Commerciales 1978) and in law (Université de Paris 1979),Bertrand de Mazières joined the French Treasury on graduating from l’Ecole Nationale d’Administration in 1982. He wasFinancial Attaché at the French Embassy in Washington from 1986 to 1988, Head of the banking division at the Treasuryfrom 1989 to 1993 and Deputy Secretary for debt and development from 1993 to 1996. In this latter capacity he was Vice-President of the Paris Club in charge of negotiating the restructuring of sovereign debt from 1993 to 1996.

Bertrand de Mazières was nominated General Secretary and Chief of staff of the Conseil des Marchés Financiers CMF inOctober 1996, when the CMF was founded as the regulatory agency responsible for the good conduct and theprofessional standards of the French investment services providers, for the supervision of both regulated and off-marketoperations in France, and for the authorisation of tender offers. He held this office until CMF and another regulatoryagency, the Commission des Opérations de Bourse COB, were merged into the Autorité des Marchés Financiers AMF inNovember 2003. In December 2003, he was appointed Chief Executive of Agence France Trésor, the division of the Ministryof Economy and Finance responsible for the management of the debt and treasury of the French Republic. He held thispost until August 2006 when he left to join the European Investment Bank as its Director General for Finance. In June2007, he was also elected President of AMTE (Euro Debt Market Association).

Bertrand de Mazières is married to an English wife. They have three children and live in Luxembourg.

Jonathan Taylor has been a Vice President of the European Investment Bank since January 2013. He is a member of theEIB’s Management Committee which draws up the Bank's financial and lending policies, oversees its day-to-day business,and takes collective responsibility for the Bank’s performance.

Mr Taylor has particular responsibility for the Bank’s activities in Denmark, Finland, Ireland, Sweden, and the UnitedKingdom. He also leads the Bank’s work in climate action, and in other environmental lending policies. Internally, he isresponsible for a range of control functions, such as audit, compliance and related issues.

Mr Taylor was previously Director General of Financial Services and Stability at HM Treasury (the UK Finance Ministry).He has held a range of posts in both the private and public sectors. He is a graduate of the University of Oxford, inPhilosophy, Politics and Economics.

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SkanskaGreenBond

In April 2014, Skanska issued its first Green Bond,SEK850m (€92.3m) with a five-year term. SEBacted as arranger. The bonds were issued under

the Skanska Financial Services Medium Term Noteprogram.

Skanska is one of the world’s leading constructiongroups with expertise in construction, development ofcommercial and residential projects and public-privatepartnerships. The company carries out all aspects of the

construction, development andinfrastructure process. It also aims toconduct business with respect toethics and sustainable development.

Buildings consume around 40% ofprimary energy consumption in mostInternational Energy Agency (IEA)member countries (IEA/UNDevelopment Programme, 2011).Energy efficiency improvements inbuildings are therefore necessary toreduce energy consumption and CO2

exhaustion globally.Sustainability is key to everything

Skanska does, and as a business it isstriving to reach a point whereconsiderations of economic,

environmental and social impacts underpin all itsoperations and customer offerings.

Financing considerations:The Skanska Group is to a certain degree financing itsdevelopment of commercial real estate through corporatebonds. Practically all the commercial projects of Skanskaare green and developed according to high standards with

regards to sustainability aspects such as energy efficiency.We see a growing demand from our clients to invest

in green projects. At the same time, pension funds andother institutional investors are increasingly demandinginvestment alternatives with a focus on environment andsustainability.

Against that backdrop, we found the developingGreen Bond market perfectly aligned with the Group’ssustainability agenda. By tapping the Green Bond marketwe reach a broader investor-base, enabling us to grow ourgreen business. At the same time we offer the investorcommunity the possibility to allocate funds to truly greeninvestments.

The process leading to the first Green Bond Issuecontained some necessary activities

Establish a Green Bond framework addressingprimarily:• Eligible project criteria:

- Projects are selected by Skanska’s Green BusinessOfficer together with Skanska Financial Services.

- The projects financed should be certified or pre-certified by either of the following two greenbuilding certification-programs:- LEED -minimum level: Gold- BREEAM -minimum level: Very good

and use 25% less energy than required by applicable codesand regulations • Transparency. To enable investors to follow projects.

Investor reporting available on Skanska’s web pageincluding:- A list of projects financed- A selection of project examples - A link to the Skanska Group sustainability report.

“Sustainability is key to everything Skanska does, and as a businessit is striving to reach a point whereconsiderations ofeconomic, environmentaland social impactsunderpin all itsoperations and customer offerings ”

Par Lageryd, Head of Treasury,Skanska Financial Services

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The investor report will be updated semi-annually.• Designate a special account that will support

Skanska’s lending for eligible projects- The proceeds from the SEK 850m bond were

credited to an account earmarked for SkanskaCommercial Development Nordic whose officeprojects all are eligible for Green Bond funding.

Obtain a second opinion:• The Second Opinion is based on documentation of

rules and frameworks regarding the Energy andCarbon aspects of the Group’s sustainability agenda

• In cooperation with SEB we acquired a second opinionfrom CICERO, an independent research centreassociated with the University of Oslo.

• During the process of obtaining the second opinion,Skanska’s Green Business officer and the Group’s headof Sustainability and Green Support providedinformation and discussed the Energy and Carbonaspects of Skanska’s sustainability agenda withCICERO’s researchers.

* The Second Opinion is now available on Skanska’s webpage.

Findings:When the bond was launched, we saw that it attracted afair amount of attention and the issue was oversubscribedeven though we increased the amount to meet investordemands.

To our understanding, approximately 60% of demandcame from dedicated SRI funds of which some came from

investors that had previously invested in Skanska bondsthrough their ordinary funds.

As an unrated borrower, we also observed thatinvestors that traditionally require an official credit ratingwere able to make an exception to that rule wheninvesting in green.

With regards to pricing, we probably issued the bondsat a few basis points tighter than should we have issuedan ordinary bond. The likely reason for that is that investordemand for Green Bonds is growing faster than supply.

In the longer term perspective, there are variousreasons to whether or not Green Bonds would tradetighter than ordinary bonds

One way of seeing this is that as much as we as aborrower might like to be rewarded for borrowing moneyfor a good cause, the same is true for the investors forproviding the funds.

On the other hand, if you take into consideration thevalue persistence and profitability in the financed item, inthis case commercial real estate, we can already see thatgreen projects generally have lower vacancies, strongervalue-growth and generates higher rent levels comparedto traditional buildings.

Clearly one could argue that this should be reflected ina tighter credit spread.

Going forward, we are likely to continue issuing GreenBonds. There are enough projects developed by Skanska,eligible for Green Bond funding, to meet a substantial partof our total funding needs. This way we will broaden ourinvestor base since our traditional investors as well as thegreen accounts will be able to invest.

Buildings consume around 40% of primary energy consumption in most International Energy Agency (IEA) member countries

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The market for “green bonds” or “sustainabilitybonds” is still in its infancy, having beeninitiated by the European Investment Bank in

2007. Today, the market stands at $35.8bnoutstanding (as of 10 June 2014), with issuances in2013 ($11bn) and 2014 ($18.3bn) accounting forover 80% of the total outstanding. Experts predictthis number to at least double, or even triple, in2014. During the first four years of its existence, thegreen bond market was dominated by a fewmultilateral institutions and development bankssuch as the World Bank, the European InvestmentBank, or the European Bank for Reconstruction andDevelopment. Corporate issuers have only recentlyentered the market, but have contributed in animpressive way to its exponential growth.Companies seem to have understood that suchissuances can help them to diversify their investorbase and more specifically address SRI investors.

Corporate issuances: a novelty in the green bond market Since France’s Air Liquide launched its “social” bond inOctober 2012, twenty-five corporate green orsustainability themed bonds (See Table 1) have been

issued, together amounting to over €11bn. Nineteen ofthese were issued until early September 2014, against onlyfive being issued in 2013 and only one in 2012 (see Figure1). This illustrates the acceleration of green bond issuanceswe are witnessing in 2014. If today corporate green bondsare still only a drop in the enormous global bond marketocean (estimated at $49tr in 2013 by IOSCO), they areexpected to represent 10 to 15% of that market by 2020,according to the Swedish bank SEB.

Corporategreen bonds: challenges for a real contribution to sustainability

Julia Haake, Director of the Paris office, oekom research

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01 0.5

5

2.0

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8.5

2012 2013 2014

Number of GB Amount (bn€)

Figure 1: Growth of Green and SustainabilityCorporate Bonds 2012-2014

Figure 2: Geographical Origin of Corporate Green and Sustainability Bonds

USA 20%

Sweden 28%

Spain 4%

France 16%

Italy 4%

Canada 4%

UK 12%

Japan 4%

Taiwan 4%China 4%

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Average issuance size of these twenty-five bondshas been approximately €440m (€402m in 2013 onaverage and €447m in 2014). However, issuance sizeranges from very small amounts like that of the Swedishcompany Rikshem in March 2014 (€10.8m) up to largeones like the two massive French issuances, by EDF inlate 2013 (€1.4bn) and GDF-Suez in May 2014(€2.5bn), or that of Toyota in March 2014 (€1.3bn).

Also, in addition to the increase in the number ofissuances, the corporate green bond market hasextended geographically (see Figure 2). While at firstcorporate green bonds came exclusively from WesternEurope (36%), Scandinavia (28%) and North America(24%), Asian investors have been taking a strongerinterest lately, with the example of the recent issuancesby Chinese corporation CGN Wind in June 2014 andTaiwanese corporation ASE in July 2014.

Corporate green bonds: a chance forclimate change… and sustainability!The rapid development of a corporate green bondmarket will make many environmentalists hopeful thatthis new source of financing strengthens internationalefforts to fight climate change. This fits well with thecall by experts and institutions such as the OECD to shiftfrom fossil fuel intensive investments to renewableenergies and other infrastructures allowing for lowcarbon economic development. Over $1trn will beneeded annually in addition to the already invested$2trn in order for the 2°C climate goal to be achieved.

So far, investors seem to have taken a liking forgreen bond issuances. Although it is not alwaysspecified whether a green bond was oversubscribed, thisoften appears to be the case. For instance, the recentgreen bond issued by Taiwanese ASE was six timesoversubscribed, whilst the one of GDF Suez in 2014 wasthree times oversubscribed. Similar to the issuers, investorshave overwhelmingly come from Western Europe,

Scandinavia and North America.Furthermore, they have predominantlybeen institutional investors with around60% being SRI investors. Green bondsoffer a way for issuers to diversify theirpool of investors and attract new ones.For example, in March 2014, half of thebuyers of Swedish Vasakronan’s greenbond were thought to be new investors.

The interest in green bonds isgrowing especially among responsibleinvestors, who seem to welcome this

new asset class. From a risk perspective, green bondsrepresent another opportunity in the less risky bond marketas compared to equity. And, with the bonds remaining onthe balance sheet of the issuer and thus allowing investorsthe same recourse pari passu as other unsecured bondholders, green corporate bonds are more advantageousthan green project bonds for example.

But does “green” strictly have to mean climate related?Although the fight against climate change remains of theutmost importance, other urgent environmental mattersare on the agenda as well, like biodiversity preservation,

toxic pollutions or access to clean water, to name just afew. Proceeds from corporate green bonds are stilloverwhelmingly used for climate-related projects, but onemay in the future hope to see more corporate sustainabilitybonds are used to address broader sustainabledevelopment and thus focus more for instance onbiodiversity or even social issues.

The call for the real green thingThe basic aim of green bonds is clear and positive.Nonetheless, the responsible investment world has showngrowing concerns regarding how actually green orsustainable these bonds actually are. Before, no one reallyquestioned whether a government agency, developmentbank or multilateral institution was sincere in their goalswhen refinancing environmental projects via the bondmarket. Since car manufacturers or nuclear powercompanies have entered the market, investors and NGOshave started to wonder whether a green bond is really“green”. And voices are heard more and more oftenasking for more stringent criteria for project selection,independent verification, and standardisation. Thissituation bears similarities with what we experienced in themarket for SRI funds some 10 years ago, when increasingsupply was met by growing concern about how to define“responsible” investment in general.

Greenwashing: from soap powder tocorporate bonds?In the course of the last decade or so, environmental

Corporate Issuer Country Date Size of Second Issuance Party(in M€) Opinion

Arise AB SE September 2014 38 YesNRG Yield US August 2014 386 NoASE TW July 2014 223 YesHera IT July 2014 500 YesSainsbury's UK July 2014 252 YesVornado Realty US June 2014 335 NoCGN Wind Energy CN June 2014 124 NoGDF-Suez FR May 2014 2500 YesRegency Centers Corporation US May 2014 182 NoArise Windpower SE April 2014 124 YesIberdrola ES April 2014 750 YesSkanska SE April 2014 95 YesToyota JP March 2014 1303 NoRikshem SE March 2014 11 YesTD Bank CA March 2014 341 NoVasakronan SE March 2014 109 YesSCA SE March 2014 163 YesUnilever UK March 2014 313 YesUnibail Rodamco FR February 2014 750 YesHannon Armstrong US December 2013 75 NoEDF FR November 2013 1400 YesVasakronan SE November 2013 145 YesBank of America US November 2013 386 NoMidlands Together UK July 2013 4 NoAir Liquide FR October 2012 500 Yes

“ the recent green bondissued by TaiwaneseASE was six timesoversubscribed, whilstthe one of GDF Suez in2014 was three timesoversubscribed ”

Table 1: List of Corporate Green and Sustainability Bonds issued (2012-2014)

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NGOs have increasingly accused corporations of surfingon the wave of environmentally conscious consumers bypraising not-so-green products as ecologically friendly.Meanwhile, greenwashing is taken seriously by nationalgovernments, several of which have passed regulationsaiming to tackle the issue. The US, the UK, Canada,Norway and France are among the countries that havepublished guidelines and taken measures to ensure theveracity of claims made in commercials regardingsustainable development. Australia has gone even furtherby modifying its Trade Practices Acts to include fines forcompanies that provide misleading environmental claims.

Washing powder, cars, sliced ham: greenwashingallegations have traditionally concernedconsumer goods and not financialproducts. Is there actually no such risk?Recent green bonds have not beenexempt from controversy and will likelybe even more prone to challenges inthe future. Indeed, the “greenness” ofsome of the funded projects canjustifiably be contested, as differentpeople have different views as to whatis “green” and what is not. Nuclearenergy or carbon capture andsequestration (CCS) are some of many

examples of such potentially controversial projects. Damsare another example and have already sparkedcontroversy on the green bond market with the recentissuance of GDF Suez’s green bond. Undeniably, it haspotentially raised money for two out of four controversialdams planned as a cascade on the Madeira River, thelargest tributary to the Amazon, in Brazil. According tothe NGO International Rivers, these dams have caused theflooding of areas beyond the banks of the river, and theJirau Dam is said to have already caused serious impactson freshwater ecology, local communities and workers,notably by leading to the near-extinction of severalvaluable migratory fish species and by impactingsedimentation and water quality negatively.

It is not easy to decide which kinds of projects can beincluded in a corporate green bond without attractingnegative media and NGO attention to controversialsubjects. It will be clearly helpful for future issuers toconsult directly with environmental experts or evenpotential critics. In addition to the choice of projectcategories, the actual criteria for choosing projects to befinanced have to be defined in a clear and ambitiousmanner. For example, while it is generally accepted thatrenewable energy is of crucial importance for the fightagainst climate change, when you take a closer look atthe technological solutions at hand, different choices canlead to different environmental outcomes. For example,certain solar power cells contain harmful chemicalsubstances, which can pose problems at production sitesbut also at the end of the cell’s life cycle. As for solarparks, there can be considerable environmental damage ifsome criteria are not respected – for exampleimplementing them on buildings or brownfield landrather than areas with higher biodiversity or on farmland.

Can a clean green bond greenwash a dirty issuer?We have seen that there are multiple ways to ensure that agreen bond is really green and prevent investors fromfinancing projects that might be contrary to theirresponsible investment policy. However, one question stillremains open. While in traditional responsible investmentapproaches via funds or mandates, corporate issuers areusually examined from a critical ESG perspective, this is notnecessarily the case when a bond issuer decides unilaterallythat its bond issuance is “green”. Imagine that an issuer hasdeveloped stringent criteria for choosing and evaluatingprojects, but that at the same time, as a company, it is badlyrated by sustainability rating agencies or identified ascontroversial by media or NGOs. Does a responsible investormeet its investment criteria when investing in a green bondissued by such a controversial company?

One solution is of course to make the green bondstrictly asset linked and ring fenced and thus to argue thatthe financing goes only to specific projects but not to thegeneral (badly rated or controversial)activity of the issuer itself. But still, some investors do raise concern aboutthe environmental integrity of corporategreen bond issuers. For example LiseMoret, senior responsible investmentanalyst at AXA IM, when asked aboutgreen bonds by the Financial Times inDecember 2013 argued that: “it will beimportant to analyse and monitor bothissuers and their projects to ensure theyremain consistent with green bondeligibility criteria”. Such a viewpoint seems even moreimportant when the “green” investments financed throughthe green bond would have been made even without thespecific issuance (or have already been made and the greenbond serves as refinancing for the investments). If capital israised via a green bond additionally to “business as usual”,it might seem less important to take a very strict stance onthe issuer’s ESG performance.

What if a green bond issuer is per se excluded froman investment portfolio via its core business? A range ofresponsible investors, especially in German-speaking andNorthern European countries have adopted exclusionpolicies of sectors such as military, alcohol, gambling,nuclear energy, to cite just a few examples. The case ofthe EDF issuance in late 2013 illustrates such a dilemmasince the company generates a large part of its turnoverfrom nuclear energy. A thorny decision to be made byethical investors with such exclusion policies…

Not only the business sector of an issuer can poseproblems for responsible investors, but also its generalESG performance, which would lead them to not includeit into an SRI fund. Take for example the case of VornadoRealty Trust, who issued a $450m green bond in June2014 for financing energy efficient building projects. Atoekom research, we have identified several weaknesses inthe corporate rating of this company, concerning namelyenvironmental construction and energy efficiency of itsproperty portfolio. A responsible investor analysing both

“ the “greenness” ofsome of the fundedprojects can justifiablybe contested, asdifferent people havedifferent views as towhat is “green” andwhat is not ”

“Does a responsibleinvestor meet itsinvestment criteriawhen investing in agreen bond issued bysuch a controversialcompany? ”

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Julia Haake, PhD in economics, is Director of the Paris office of oekom research. Julia studied economics at Kiel University, LaSorbonne in Paris and Versailles University. She started working on sustainability issues in 1993 as a researcher in environmentaleconomics at Wuppertal Institute and then Versailles University, where she worked on various French and international researchprojects as well as her PhD thesis related to business and industry action for dematerialization and environmental sustainability. Inearly 2001, she joined O2 France, a French consulting company specialized in ecodesign and sustainability company strategies.From 2003 to early 2008, she worked for La Poste first as Group Head of Environment and then Director SustainableDevelopment in the Mail Department. In 2008, she joined WWF as Director for Business Relations. Her role there was to build upand steer partnerships with companies willing to participate through voluntary and ambitious strategies in the global reductionof humankind’s environmental footprint. She was also in charge with WWF France’s global CSR work, carrying out researchwork, publishing studies and coordinating lobbying work. At WWF she managed a team of 16 people. In October 2011, Juliajoined oekom research, one of the world’s leading sustainability rating agencies, in order to build up their office in Paris. She is incharge with institutional and customers relations in France, French-speaking Switzerland, Luxemburg and Belgium.

corporate ESG performance and green bond eligibilitycriteria thus might take a closer look at the whole picturebefore taking its investment decision.

Outlook: making green bonds reallyresponsible All of the above discussion shows that the very younggreen bond market is still somewhat wet behind the ears.In order to grow up to a responsible adult, it will surelyneed more rules and supervision. In early 2014, a groupof pioneer investment banks published the “Green BondPrinciples”, in an attempt to respond to calls for rules.While some of the criticism raised above has not beenaddressed by the principles (such as the need for projecteligibility criteria), one point will certainly make adifference. This is the need for independent actors tocarry out verification and give second party opinions onthe sustainability quality of a green bond.

Out of the total twenty-five corporate green bondsanalysed, sixteen were issued with a second opinion andnine without (See Figure 3). More specifically, in 2014,

out of a total of nineteen corporate green bonds, thirteenwere issued with a second opinion. One example of anissuer having carried out its issuance without theguidance of an independent verifier is the Japanese carmanufacturer Toyota. The proceeds of its bond are meantto fund consumer loans and leases for “green” vehiclesincluding hybrid cars. This bond has been specificallycriticised for the lack of reporting on the use of proceeds.In addition, almost no information was provided by theissuer about eligibility criteria for the projects to befinanced. In order to ensure the integrity of a green

bond, investors need confidence on criteria andprocedures used to select projects. The help of anindependent party is surely one way to raise the standardsapplied by a company.

To sum up, the entrance of corporate issuers onto thegreen bonds market since 2012 has had very welcomeeffects. Firstly, they represent a real chance for thetransition towards a more sustainable development. Thegrowth prospects of this market raise hopes that largescale investments will flow into sustainability orientedprojects. Secondly, they have provoked very helpful criticaldiscussions which are needed to bring more stringentrules and higher quality standards to the market andultimately to make sure that green bonds really are green.

Sources: • Climate Bond Initiative / HSBC (2014), Bonds and Climate Change. The State

of the Market in 2014• Financial Times, “Green bonds take root in maturing market” (Chris Flood),

December 9, 2013 • Forbes, “Growth in Green Bond Market Underscores Need For Market

Standards” (Vic A. Rojas), June 30, 2014• ISCSO, “Corporate Bond Markets: A Global perspective”, February 2014• Reuter.com, “Taiwan's ASE brings Green bonds to Asia's corporate sector”

(Frances Yoon), July 18, 2014• Global Capital, “Green bonds: getting investors out of bed for the climate”

(Jon Hay), March 31, 2014• IFR, “Green is the new black” (Keith Mullin), June 26, 2014 • International Rivers, “”Green Bond” Issue Risks Raising Finance for

Destructive Dams” (Ryan Brightwell and Zachary Hurwitz), July 9, 2014• Novethic, Green and Social Bonds. A Promising Tool. November 2013 /

Update May 2014• Standard&Poors “The Greening of the Corporate Bond Market”, May 20,

2014• The Economist, “Green Bonds: Spring in the air”, March 22, 2014 • The Economist, “Green Grows the Market, O”, July 5, 2014

Oekom’s recommendations for a high quality green bond• The issuer itself should provide a minimum level of sustainability

performance.

• The bond should be asset-linked and proceeds ring-fenced forsustainability purposes.

• The Green Bond Principles should be respected(Transparency/Processes/Reporting).

• The most ambitious possible sustainability criteria should be appliedfor project selection.

• An independent second party opinion should be supplied.

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second party opinion

no second party opinion

Figure 3: Corporate Green and Sustainability Bondsand Second Party Opinions

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How standardization can help ensure that the green bonds marketdelivers on its potential

2014 has been a big year for green bonds1. We’veseen the market grow very quickly and we’ve seeninvestor interest levels soar. We expect 2014issuance to reach over $40bn – four times 2013issuance.

Growth is fantastic but growth todate has to be seen as just step one.The bulk of issuance so far hasinvolved highly creditworthy issuersrepackaging assets as green bonds;the next step is to ensure that thisgrowth has a bigger impact.

This is an opportune moment totake a step back and remember whatthis market is for... the market beganas a tool to help investors identifyfinancial products that shift capital

towards investments that address climate change. Thiswas the theme of The European Investment Bank, WorldBank and IFC bonds, for example. Green bonds that linkproceeds to particular projects or assets are a means ofdoing this.

This concept of shifting capital directly towardsparticular projects/assets is unique to bonds. The majorityof SRI/ESG-related investment to date has been concernedwith equities, where the analysis has been at thecompany-level. Thematic bonds can enable investors toshift capital more directly towards particular projects andthus the environmental analysis is more relevant at theasset-level. This new market provides new opportunitiesbut also brings with it a few challenges.

(Note that we refer in this article only to thematicbonds that are contributing towards environmental goals –i.e. green bonds. There are other thematic bonds that

Sean Kidney, Chairman and co-founder,Climate Bonds Initiative

Bridget Boulle ,Program Manager, Climate Bonds Initiative

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address social challenges such as the World Bank/IFFIVaccine bonds. We have kept these discussions separatedue to the different nature of assessing the underlyingimpact or benefit)

The growth that we’ve seen in the labelled greenbonds market shows that there is a real chance that the

market can shift substantial capitaltowards climate and environmentalsolutions. We do have a way to go:the +$20 billion we’ve seen so far in2014 is tiny compared to the IEAestimate of $53 trillion required by2035 to avoid “catastrophic” globalwarming. But the corporate marketonly began last year so this is just thebeginning.

The important next step is toensure that the market continues to

grow and that it is genuinely contributing to solutions thathave a significant impact.

The green bonds market is built on the confidencethat funds will genuinely be deployed for to green assets.Confidence is the key word; financial markets have a habitof evaporating when that confidence is shaken.

To maintain that confidence we need a rigorousapproach to assessing the green claims of investments; isalso helps if a common framework exists that allowsinvestors to easily compare the environmental andreporting characteristics of different bonds. This willespecially important as a wider range of issuers, at lowerrating levels, come to market over the coming year.

At present there is no standardised approach for theissuance of a Green Bond. More standardisation willbecome particularly important as issuance broadens frommore obvious “green” areas such as renewable energy andwe expect investors to push for more clarity on what typesof projects can be defined as green. A common, science-referenced classification of what is green will also beimportant to the next stage of growth.

Below we identify three major risks to the market’scredibility and some description of how standards can helpto reduce these.

1) Green-wash risk: the risk that the proceeds aredirected towards projects that have no meaningfulimpact on solving an environmental challenge butserve primarily to boost the reputation of thecompany.

There are no examples of pure green-wash that we have identified to date –while different bonds have haddifferent levels of impact (more onthat below), from what we can gather,they all have had or will have animpact.

It’s possible that we will seegreenwash in the future and standards

are the obvious way to avoid this – a set of widely-accepted standards saying which assets can and can’tbe included in a green bond will avoid any projects

with dubious environmental credentials beingfinanced with a green bond.

2) A low-impact marketThis is the risk that the market becomes a very “pale”green one – where the lowest possible hurdlerates/standards have been used to determine ‘green-ness’ and the market becomes pool of bonds with lowenvironmental impact and but high PR value. For example, a river clean-up that cleans the water abit but doesn’t make it drinkable; a climate investmentthat reduces energy consumption a little but stilldoesn’t make the building/factory/company in linewith requirements for a 2 degree world. This is the biggest risk to the market.It’s not pure green-wash as there is someenvironmental benefit, but the opportunity to use thismarket to shift large amounts of capital towardsenvironmental/climate solutions would be missed.The best way to avoid this riskwould be to ensure that rigorousstandards are in place that supporthave a bigger-picture perspective toenvironmental challenges – i.e. thatbenchmark an environmentalbenefits to what is required from aglobal perspective. This doesn’t mean measuringimpact alone (although this willcertainly be a part of it) but ratherlinking this measurement to what isrequired. E.g. if buildings need toreduce carbon emissions by 40%then a building which does so by 5% isn’t sufficient. Similarly, tonnes of CO2 reduced is meaninglesswithout a benchmark – is 100t a lot or is greaterambition needed? Such standards may seemambitious but they’re also necessary. The ClimateBonds Initiative is working with others to make thishappen (see below).

3) Misuse of proceeds post issuance.This is the risk that the bond doesn’t end up financingthe types of projects that it set out to at the point ofissuance.We haven’t seen this yet in the case of labelled greenbonds but it is a concern that investors have raised. Atthe moment, we believe that reputational impact issufficient to discourage any misuse of proceeds.However, if there becomes a point in time where thereis a high risk of misuse of proceeds, standards couldgo some way to mitigating this concern. Investorscould: a) require legal bond documentation to specifythe commitment to use of proceeds (so that itbecomes legally binding), b) specifying a minimumreporting period for issuers to report to investors onallocation of funds towards projects; c) requiringissuers to provide recourse to investors in the case ofmisallocation of proceeds. This could, for example, bein the form of a put option.

“ the +$20 billion we’veseen so far in 2014 istiny compared to theIEA estimate of $53trillion required by 2035to avoid “catastrophic”global warming ”

“The best way to avoidthis risk would be toensure that rigorousstandards are in placethat support have abigger-pictureperspective toenvironmentalchallenges ”

“ It’s possible that we will see greenwash inthe future and standardsare the obvious way toavoid this ”

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The London-based Climate Bonds Initiative promotes long-term debt models to fund a rapid, global transition to a low-carbon economy. The Initiative undertakes projects to promote policy architecture that will support renewable energy andenergy efficiency investibility, and to educate investors and prospective issuers about the opportunities with climate-themedbonds. The Initiative has recently launched an International Standards and Certification Scheme for climate bonds. The firststandards-compliant bond will be released in July. It is also promoting a political risk insurance program for renewableenergy investors in the EU; the provision of selective guarantee schemes by the public sector to support a rapid shift ofcapital into low-carbon industry sectors; and the creation of green investment banks.

Sean Kidney is the CEO of the Climate Bonds Initiative, an international NGO working to mobilize debt capital marketsfor climate solutions. Projects include a green bond definitions and certification scheme with $22 trillion of assetsrepresented on its Board and some 50 organizations involved in its development and governance; and working with theChinese Government’s Development Research Centre on how to grow green bonds in China. Sean is also a director of theNetwork for Sustainable Financial Markets, an international group of finance sector professionals, academics and others whosee the need for fundamental changes to improve financial market integrity, stability and efficiency. Sean was previouslymarketing advisor to a number of the largest Australian pension funds.

Bridgett Boule Manager - Market and data analytics. Bridget has worked at the Climate Bonds initiative since January 2012where she has worked on the 2012-2014 State of the Market reports as well as on green bonds market analytics, greensecuritization and other projects.

She has been working in sustainable investment for 6 years including at Henderson Global Investors in the SRI teamwhere she was involved in the identification and analysis of sustainability issues with investment relevance for the SRI funds.Previously, Bridget worked at PIRC in London and at Kaiser Associates Economic Development Practice in South Africa whereshe gained experience advising institutional investors on environmental issues and in consulting on economic developmentprojects.

Bridget holds a BSc Environmental Science and BCom Hons Economics from the University of Cape Town.

Common standards are a pivotal part of crediblegreen bond market growth. In the short term, they may bedifficult to attain as they require a great deal ofcollaboration between potentially-competingorganisations. In the long term, we believe that the

interests of multiple parties willconverge towards a set of commonstandards.

For investors, who will demandthe standards, the benefit will be ameans of making quick decisionsknowing that common criteria havebeen applied across different bonds;due diligence on one set of standardsreduces due diligence effort onindividual bonds.

For underwriting banks, a common set of standardswill provide an easy-to-use tool to identify qualifying assetswithin clients. This will also give external credibility to theiradvice to clients.

For issuers, standards help them to easily identifyqualifying investments.

For ratings agencies, common standards will reducethe potential for conflicts of interests from the issuerpaying for a review and thus provide further credibility tothem. It will also ensure less-reputable agencies do notmake inroads to the market by certifying just anything. Intime, certain agencies will gain a reputation for theirexpertise in particular areas or geographies allowing themto differentiate themselves despite using commonstandards.

The Climate Bonds Initiative publishes open accessguidelines for which climate-related investments thatcould be associated with green bonds. Guidelines, or"Climate Bonds Taxonomy", are developed by internationalexpert committees made up dozens of academic andindustry experts. The guidelines are a free resource forindependent reviewers and others as a basis fordetermining eligible investments.

“ In the long term, we believe that theinterests of multipleparties will convergetowards a set ofcommon standards ”

1. The generic term “green bonds” refers to bonds marketed around their environmental credentials. They may be labeled “green bonds”,“climate bonds”, “sustainability bonds” or even “water bonds”.

Notes and caveats to the Green Bond Underwriter League Tables on page 51:There are plenty of ways to make a league table and each bring with them different outcomes so here are a few notes...• Graphs include only the largest 12 underwriters in each time period but there are many others that have underwritten deals.• All data includes only bonds labelled and marketed to investors as ‘green’ or ‘climate’, the primary definition of this market. This means

that figures do not include renewable energy projects or other bonds linked to green projects but not labelled and marketed as such.• Totals are calculated by taking the total deal size divided by the number of lead managers as is the general practice• Other league tables representing a larger market would usually present data by year, by currency or both. Given that this green bonds

market is still relatively small, there is limited scope to break up the market at this stage. • Some issuances fall on the cusp of the quarter in which case we use the announcement date as recorded on Bloomberg to determine its

quarter. • Exchange rates taken as the last price on the announcement date

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The green bond market is new and the rulesare still to be determined. This leaves themarket players open to pushing the

boundaries or creating their own. Did you noticethat in this summer’s football World Cup thereferees used a small canister of white vanishingspray. This brought a simple and swift end to free-kick creep: a temporary line drawn on the grass toindicate the boundary point beyond whichdefenders could not pass until the free-kick hasbeen taken. You could call it an example of failedself-regulation; a visible line needing to be drawn.

Regulation balanceIs it not human nature to push the boundaries? But thisbrings risks, especially if we are considering the financialmarkets where there is a poor track record of fair play(think financial crisis of 2008, euro crisis of 2010, LIBORfixing). Participants in the green bond market are painfullyaware of past failures and some conversations have

Drawing the line:why second partyopinion andverification providean important anduseful guiding linefor the success ofthe burgeoning green bond market

Lindsay Smart, Vigeo Head of UK and US Markets

Current key risks to, and of, the green bond market

Regulation balance Supportive and not stifled crediblegrowth

Green washing Funding of projects which don’t offergenuine environmental benefit

Decoupling Decoupling of project environmental environmental & social and social implications e.g. an

environmentally positive project thathas socially negative impacts

Decoupling project Decoupling of the promise of a green & issuer project and a lack of assurance on the

environmental and social behaviour ofissuers

Evidence gap Promises on the environmental andsocial nature of a project with a failureto report on use of proceeds andproject outcomes.

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already begun which explore the introduction offormalised regulation to this market. These includeconsequences for the failure of use of proceeds to fundgenuinely green projects such as the integration of putoptions into the bond. At this stage in such a new and,relatively speaking, small market [US$40 billion greenbonds having been issued at the end of 2013, of a bondmarket which totals US$14 trillion in the US alone(Bloomberg, 2014)] there is concern that overly restrictiveregulations could create a hurdle level which is too highfor issuers and effectively halt market growth.

Green-washingIf, however, there is no structure or reassurance aroundthe content of what is brought to the market under thesenew labels of “green”, “SRI”, and “ESG” bonds then thelack of information and comparison could be equallyrestrictive to the market’s growth.

Let’s draw a comparison to the existing bond market,which has been around for over 100 years. A key elementto pricing the coupon of a bond is the likelihood of theissuer defaulting on the repayment, which is assessed by acredit rating agency. Over time, the market has coalescedon three opinion providers (Moody’s, Fitch and S&P)whose rating impacts the borrowing rate accessible to thebond issuer. It has become almost unthinkable for anissuer to go to the market and simply tell potentialinvestors that they are financially sound and that thebond money will be repaid. A second opinion from, at a

minimum, one of these credit ratingagencies is in most cases essential.There are routes around this throughloans and private placement, but thecost to the issuer is higher, reflectingthe reduced reassurance in repaymentand the inability to spread the riskacross the open market. To access theopen market you need to be able todemonstrate a credible investment.

Responsible investors (RIs) also havea strong imperative for transparency.These investors seek to capitalise oncorporate competitive advantage

generated by a strategic and integrated approach towider social and environmental stakeholderresponsibilities. These include benefits in riskmanagement, cost savings, access to capital, customerrelations, human resource management, and the ability toinnovate. RIs have developed methods to integrate theseenvironmental, social and governance (ESG) metrics inorder to exploit intangible information from stakeholderanalysis for an investment advantage. This body ofresponsible investors plays a strong role in demandingtransparency in corporate activity to enable robustassessment of their performance based on these metrics.Initially, ESG integration was focused on equityinvestment, but more recently demand for fixed incomeopportunity has grown, with a similar demand fortransparency. RIs have demonstrated a keen interest in thegreen bond market, which in turn offers an attractiveopportunity to the green bond issuer for investor

diversification (see Box 1, and the % of RI investors, andBox 3). But RIs have also expressed concern thatgreenwash may enter the market, particularly as it grows.

The green bond market grew exponentially in 2013,leading to this broad concern over the current and futurequality and purpose of issues. In an attempt to bringstructure, the Green Bond Principles (GBPs) were launchedby four founding investment banks, in January 2014.These provide voluntary guidelines that recommendtransparency and disclosure and promote integrity in thedevelopment of the green bond market by clarifying theapproach for the issuance of a green bond. Theseprinciples include a recommendation for an independentsecond party opinion on the bond purpose and likelyoutcomes.

Although not regulations, these guidelinesnevertheless provide an indicator of market expectationsfor credible market growth. Just as the original bondmarket recognised that you can’t bring a bond tomarket without some independent reassurance on thecredit quality, the clear signal here is that nor should youbring a green bond to market without some assuranceon what qualifies it to be labelled as green or any similar label.

But why does it matter? What happens if you don’t?For now, probably nothing. No regulation means noprescriptive consequences for violation by participants.But in the long term, few markets (especially financial)can achieve large scale and be fit for purpose withoutbroadly accepted participatory guidelinesat a minimum, or regulations over time.

The other consideration here is thatthe purpose and potential of this marketis to achieve something very important: todrive much needed private capitaltowards a more sustainable economy.That should not be forgotten by any ofthe participants. It is the biggest risk. Ifparticipants are under no scrutiny orexpectation to be clear on the projectobjectives then the real loss is to us all inlimiting this new market’s ability for long-term financing of sustainable activity.

If the expectations on issuers are unclear then itbecomes harder for them to come to the market. If thecontent of the offer is not transparent then it is less

“ It has become almostunthinkable for anissuer to go to themarket and simply tellpotential investors thatthey are financiallysound and that thebond money will berepaid ”

“ few markets (especiallyfinancial) can achievelarge scale and be fitfor purpose withoutbroadly acceptedparticipatory guidelinesat a minimum, or regulations over time ”

BOX 1.Bonds with Vigeo ESG second party opinion

Issue Date Corporate Name % ResponsibleInvestors

Mar 2012 Ile de France unknownOct 2012 Air Liquide 50

November 2013 EDF 60February 2014 Unibail-Rodamco 68

April 2014 Iberdrola 57April 2014 Ile de France 85May 2014 GDF Suez 64July 2014 DC Water currently

unconfirmed

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appealing to investors. Eventually, these stumbling blockswill likely cause the market to fail. This won’t beimmediate, because the demand and desire for such apotentially important market to succeed is helping tonurture it through these exploratory beginnings. But thiswon’t last forever. It will only take one or two high profilefailures such as projects with net negative impact, orwhich over promise and, when scrutinised, under deliver.The goodwill will fade, along with any differentiatingbenefits to issuing a green bond. A very simple step existsto help hurdle these potential blocks: independentopinions and verification.

Decoupling environmental and socialVigeo were first asked to bring their expertise inEnvironmental, Social and Governance (ESG) researchand consultancy to the bond market by Air Liquide, whoissued the first Socially Responsible Investment (SRI) Bondin 2012 to specifically appeal to Responsible Investors.We consider it a risk for the issuer to separateenvironmental and social factors when considering thevalue of a project. Air Liquide felt that to be credible inlabelling the bond as SRI, they needed a relevant secondopinion on the use of proceeds that took into accountenvironmental, social and governance integration. Thiswas even before the Green Bond Principles werelaunched, which is to the credit of Air Liquide. Theyconsidered that Vigeo had the expertise to provide anESG opinion on the sustainable quality and social

benefits of the Home and Healthcaredivision of the company to which theproceeds were being directed.

The inclusion of environmental,social and governance (ESG) criteriainto projects and project managementis an area of debate within the industry.Vigeo’s assessments and frameworksintegrate E, S and G at each stage.Should these elements be included?Does this dilute from the taskconsidered by many as the mosturgent: that of tackling climate

change? At Vigeo, we believe this approach is essential,and is not diluting but reinforcing, for two key reasons:

1. Complexity: you cannot tackle one of theseproblems in isolation. Companies do not operate in avacuum. The challenge of bringing capital to asustainable economy is not a linear problem, but one

reflected in the multiple challenges of maintaining theresources of healthy and stable ecosystems – freshwater, clean air, robust biodiversity, productive land –and on the stability of just societies. These problemsare therefore unlikely to be solved by a linear or siloedapproach. Academics such as Meadows, Copra,Elkington and Sterman have highlighted that solvingcomplex problems, such as those facing ourenvironmental and social systems, typically requirescomplex and systems-based solutions. This is certainlynot an easy challenge. But toignore the interconnected risk and associated complexity is to increase the risk to the company,the investor and market success.

2. Opportunity: we face bothenvironmental and social challenges.In the longer term it would limit thefull possibilities of the market tofocus only on climate or green.Indeed, the Great Transition Report(2009) forecasts that in the period to2050 the cumulative costs associatedwith climate change will range fromGBP1.6 to GBP2.6 trillion, while thecost of addressing social problemsrelated to inequality will reach GBP4.5 trillion. We also believe this integrated ESG approach is

aligned to the expectations of responsible investors; ademographic that Vigeo seeks to serve and has manyyears experience of working with. It is for this reason, thatVigeo’s independent second party opinions consider ESGat each stage of the process.

Decoupling project & issuerThe next corporate to approach Vigeo was EDF, theFrench state-owned energy utility. They were seeking towrap a similar level of credibility around future renewableenergy project funding (ring fenced to the EDFRenewables entity), and enter the green bond marketwith the inaugural corporate green bond. Vigeo built aselection framework through which the future renewableenergy projects could be screened for eligibility accordingto ESG requirements. Vigeo also provided an opinion onthe ESG performance of the parent company EDF as theultimate financial backer to the bond. Again, the inclusionof this issuer information alongside the project is relevant,in particular to serve Responsible Investors, for whom weunderstand a transparent view on the ESG performanceof the company ultimately backing the bond issuance isan important investment consideration.

Underpinning all of Vigeo’s work is our proprietaryESG research methodology based on the guidelines,standards and recommendations of international bodiessuch as the OECD, UN and ILO, formulated into over 300managerial action principles represented by 38sustainability drivers. These are grouped in 6 domains(environment, human resources, human rights,community involvement, business behaviour, corporategovernance) and customised to 36 sector models.

“The inclusion ofenvironmental, socialand governance(ESG) criteria intoprojects and projectmanagement is anarea of debate withinthe industry ”

“ in the period to 2050the cumulative costsassociated withclimate change willrange from GBP1.6to GBP2.6 trillion,while the cost ofaddressing socialproblems related toinequality will reachGBP4.5 trillion ”

BOX 2.Strengths of the Vigeo structure: The company has a dual structure of ESGRating Agency (Vigeo Rating) and ESG Consultant (Vigeo Enterprise). This uniquestructure to Vigeo is a model which some have criticised, however in this market itoffers the ideal combination of skills – understanding and access to ResponsibleInvestors and separate ESG consultancy through which to build bespokeframeworks of project outcome, management and reporting assessment. Vigeohave operated this structure for over 10 years ensuring that it has fully consideredand accounted for all possible conflicts of interest ensuring the appropriatetechnical system and human resource segregation is in place.

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The scope of services we provide and the content ofour opinions typically contains customisation to reflect thespecifics of the issue. Our approach has evolved so thatwhen providing our opinion we apply our ESG assessmentmethodology to a template of steps which details: • the definition of projects categories with associated

environmental and/or social benefits; • the integration of environmental, social and

governance criteria within the project’s management;• the ESG performance level of the issuing entity and

its ability to mitigate ESG controversy risk, and • indicators and reporting commitments for fund

allocation, environment and/or social outcomes, andresponsible management Vigeo has now had the privilege to work with a

number of issuers (both corporates and public bodies)who have sought our independent second party opinion.Each has wanted to demonstrate their leadership in ESGcommitments, been willing to learn through the processof assessment, bring transparency to their actions, and inturn their credibility to the market (see boxes 1 & 3).

Evidence gap Each time we are involved in an issue we seek

feedback from the issuers, the lead banks and book-runners, and investors to evolve the structure of oursolution, aiming to ensure it responds to this evolvingmarket. Reflecting on this feedback we see a growingdemand for investors to be able to demonstrate impactresulting from their investments. For the green bondmarket this leads to a demand for commitments from theissuer to provide an audited report of the use of proceedsover time, and increasingly to report on the positiveoutcomes of the funded project(s). The last step ofVigeo’s second party opinion is on an issuer’s reportingcommitments and aims to provide a solution to thisinvestor demand and key aspect of demonstrating thevalue of the market over the long term.

Certainly here, the more concrete and clear feedbackthe investment market can provide the faster the

evolution of content; for no doubt the model is still notyet perfect. Indeed we’ll continue to refine and refresh toensure this service is providing the best possibletransparency on issuer action; and always in reference toa robust and opposable methodology.

There is a need for more defined rules around thismarket. Further debate is required on what rules these areand if grades (or shades) of green bonds are needed. Itshould be kept in mind that at present a ‘green’ bonddoes not receive a different price to a vanilla bond.Therefore, the green rating does not have a price benefit.What then is the implication if a company gets a darkershade of green rating for their bond? These are alldiscussions to be had, and solutions to be explored.Ideally these solutions should learn from the lessons ofthe existing finance markets, which may be a startingpoint but need not be a template. There are many whoconsider the current credit rating model to befundamentally flawed. Any new ‘green’ rating systemshould certainly consider these criticisms in its structure. It is a complex challenge.

However, like footballers who need a white line onthe grass to demonstrate where they can stand, so thegreen bond market will be a better market place that willfunction more effectively if it draws its own visible linesthat all participants can see and understand. Anindependent opinion on the purpose and structure ofbond projects provides this information. Whether anissuer choses the approach which Vigeo champions tointegrate ESG throughout the process, or not, secondparty verification is a simple, effective and existingsolution that allows participants to know what they arebuying without the risk associated with issueroverstatement. It takes away the risk of creepingdegradation of standards, without overly restrictiveregulation. It is a way to bring the fairness, transparencyand credibility essential to a healthy market. It will surelystill evolve, transform and improve, but it is difficult toargue that it should not have a formal role in the greenbond market.

References:Bloomberg New Energy Finance, 2014. Green bonds marketoutlook 2014. [pdf]. Available at:http://about.bnef.com/white-papers/green-bonds-market-outlook-2014/content/uploads/sites/4/2014/06/2014-06-02-Green-bonds-market-outlook-2014.pdf.

Spratt, S., Simms, A., Neitzert, E. and Ryan-Collins, J. (2009)The Great Transition: A tale of how it turned out right, NewEconomics Foundation, part of the work at the NEF ondeveloping a new economic model.

Lindsay Smart joined Vigeo, a research agency specialising in environmental, social and governance assessment, in 2011with the opening of the London office. She is responsible for client service and solutions, business development, and marketgrowth for Vigeo in the UK and US. She joined from Citi where she worked on sustainable business strategy and headedcommunication for the CEO of the Global Transaction Services division. Prior to Citi, she worked for Allianz Global Investorswhere her responsibilities included business development and client service for institutional investors in the sustainability andenvironmental technology investment products. She also previously worked for JPMorgan Asset Management and ChaseManhattan Bank. Her career began as a marine mammal research scientist. She holds a Bachelor of Science, Masters ofScience, is IMC qualified, a member of the UKSIF Analyst Committee, and a student of the University of Cambridge’sSustainable Business programme.

BOX 3.“As the first US green bond issuance with an independent opinion, it not onlysignaled to the broader market our ESG credentials as an enterprise, but alsohighlighted the unique water quality and climate resilience features of the projectthat we were financing. DC Water ultimately received over $1 billion of orders –and nearly $100 million of those orders were from dedicated SRI funds. These werenew, first-time investors to DC Water and I credit the strength of Vigeo’s opinionwith supporting our green bond credentials and giving our investors confidence.”

Mark Kim, CFO, DC Water

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What Qualifies as Green?For investors considering investing in a green bond, anobvious question to begin with, along with maturity andcoupon rates, is what qualifies as “green.” What are bondholders really funding, and what beneficial outcomes canthey anticipate? Investors should look for detailed,credible and transparent eligibility criteria for the use ofbond proceeds as well as an indication of what positiveimpacts the bond will achieve.

Green bonds issued to date have varied significantly inthis regard. Most of the early green bonds were issued bydevelopment banks and multilateral organizations that haddeveloped reasonably clear selection criteria for greenprojects. However, with the rapid entry of corporate issuersinto the green bond market during the last two years, theframeworks used to determine project eligibility have notalways been as clear, and some issuers have faced criticismfor inadequately defining their selection criteria. The ClimateBonds Initiative aims to address this concern by establishingthe Climate Bond Standard, a set of standardized eligibilitycriteria for climate/green bonds that will be used as the basisfor a certification scheme. To the extent that certification isachieved, this initiative will contribute significantly toinvestor confidence in the credentials of green bonds.

As this space evolves, however, there is a need forframeworks that capture both environmental and socialaspects. Some corporates, such as Lloyds Bank Group, areissuing bonds that explicitly aim to achieve positive socialimpacts in addition to positive environmental impacts (seetext box). It is likely that, moving forward, corporateissuers will increasingly aim to align their bond frameworkwith their sustainability strategy and initiatives, whichoften incorporate social impact goals, and brand them as“sustainability bonds” or “ESG bonds”.

Apart from project selection criteria, there is thequestion of the potential impacts of projectimplementation, and how the consideration of suchimpacts is built into eligibility criteria. A renewable energyproject may meet criteria for carbon emissions reduction,but, if it is not planned and managed well, it may alsohave detrimental impacts on local communities or wildlife.

Some issuers have addressed this aspect of impact.For example, the European Investment Bank appliesgreen bond eligibility criteria that address in detail theneed to manage the social and environmental impacts ofproject implementation. Some corporate issuers, such asIberdrola, also apply criteria to the use of proceeds thataddress the social and environmental impacts of project

Vikram Puppala, Associate AnalystSustainalytics

IntroductionGreen bonds offer tremendous opportunities for responsibleinvestors to link their investments directly to business activitiesthat will have a positive impact. In the face of growingsustainability challenges and the urgent need to mobilizecapital to address these challenges, it is a welcome opportunity.The rapid uptake of green bond issues reflects a growinginterest among institutional investors in investment vehicles thathave a positive impact beyond best-in-class ESG management.

This opportunity also creates challenges for investors innavigating the rapidly growing and evolving terrain of greenbonds. What evidence and reporting do investors need to haveconfidence that green is green and that a bond will deliverpositive impact? Within the diversity of green bond issuances,what differences should investors pay attention to? Especiallywith the emergence of corporate issuers in this market,navigating this diversity is becoming more challenging. Thisarticle provides an overview of key considerations for investorsin green bonds:• What qualifies as “green”?• What management and reporting should investors expect?• What are the actual impacts of a bond?

Key considerationsfor navigating greenbond issuances

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implementation. In general, however, this area deservesmore attention from both issuers and investors than ithas received to date. Investors that consider the ESG-related impacts of investments in general should alsoconsider such impacts for projects/activities beingfinanced by bonds, even if the project itself qualifies as“green” or “sustainable.”

In sum, green bond investors should look foreligibility criteria that are clearly formulated, credible, andtransparent, and that not only define categories ofprojects/activities that are eligible for financing but alsoaddress the impacts associated with projectimplementation. The existence of such criteria will giveinvestors confidence that a certain bond is aligned withtheir goals for positive impact as well as avoid thereputational risk that may be associated with investing ina green bond that does not live up to its objectives. Third-party consultants can help to ensure such credibility andcompleteness, either by helping to build the frameworkand eligibility criteria for a bond or by providing an

opinion as to a framework’s credibility.

The Critical Role of GoodManagementIn order for a green bond to deliver onits promises of positive impact, it isnecessary that there be effectivesystems and processes in place for theallocation and management ofproceeds. A bond with a robustimplementation process and properoversight will have a more efficientallocation of resources, thus improvingthe intended outcomes of the bond.

Investors should not be satisfiedwith a bond framework that focuses only on the eligibilitycriteria without clearly showing how projects will beselected and how the proceeds will be allocated. The

Green Bond Principles state that the issuer should outlinethe decision-making process it follows to determineeligibility of the individual investment. Development banksand multilateral organizations generally have robustprocesses for allocation and management of all bondproceeds, whether “green” or not, and in this regard, canserve as a best practice for corporate issuers. For exampleFMO, the Dutch development bank, has a clearly definedinvestment process that includes 1) client selection 2)appraisal and approval 3) contracting and 4) monitoring.

The robust, publicly transparent project selection andmonitoring processes that are typically in place atdevelopment banks often are not present amongcorporate issuers. While companies can establish suchprocesses internally, many choose to rely on a third partyto support their development and implementation. Theeligible project categories should be identified prior toissuance with commitment from the issuer to comply withthe identified project areas, coupled with clear disclosureon not only what projects were selected but also howthey were selected. A third-party assessment and opinionof issuer processes can increase investor confidence that abond will be managed efficiently and that intendedoutcomes will be achieved.

It is also important that investors understand therelevance of the bond to the issuer in order to haveconfidence that the committed projects will beimplemented as planned and within the time frameindicated. It is common to find issuers committing tomulti-million dollar projects that require significant internalresources and oversight for effective implementation.Without a clear focus, oversight and resource commitmentfrom the issuer’s board or management, there is risk thatthe implementation may fall short of its targets or take toolong for investors to realize environmental or social returnon their investments. To avoid this, investors shouldconsider whether or not bond objectives andcommitments are aligned with company priorities.

“ Investors should notbe satisfied with abond framework thatfocuses only on theeligibility criteriawithout clearlyshowing how projectswill be selected andhow the proceeds willbe allocated ”

Beyond Green Bonds?A large majority of the bonds issued in the green bond space to date have focused solely on environmental themes,especially climate change. This reflects an increased focus among many institutional investors on incorporating carbonconsiderations into their portfolios – and green bonds provide investors with an important tool to do so. Bonds focusedon environmental impact are also popular because the outcomes of green projects are tangible and impacts are relativelyeasy to quantify as there are widely accepted practices for measuring and quantifying environmental impacts.

There are, however, compelling reasons to broaden the scope of “green.” Many investors that are concerned aboutthe systemic risks posed by major environmental challenges are also concerned about those posed by various social issuesand challenges. Meanwhile, for organizations that have a social impact mandate, issuing social bonds presents anopportunity to raise capital for social projects. For example, the proceeds of the IFC’s Banking on Women Bond will beused to support IFC’s banking on women programme, which focuses on female-owned SMEs in emerging markets.

Corporates too are keen to allocate funds towards social projects within their CSR/sustainability strategies and insome cases it may not make sense to divide environmental and social projects into separate issuances. For example, theLloyds Bank ESG bond builds on the Lloyds Bank Helping Britain Prosper Plan as it is designed to specifically support thepillars of the company’s sustainability strategy. The ESG bond focuses not only on environmental impact, such as fundingmicro-renewables, but also social impact, by including a range of eligible social assets – including financing SMEs andhealthcare providers in disadvantaged UK regions. Not only is such a bond able to finance greater portions of corporateCSR activities, but also allow for larger issuances with associated liquidity gains.

The moniker “green bonds” is probably here to stay. However, it is likely that, as the market evolves, the range ofpositive impacts that bonds aim to achieve will broaden beyond “green.” Indeed a number of issuers have begun toincorporate the term “sustainability” into the names of their bonds, reflecting a broader set of goals for positive impact.

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Monitoring OutcomesA fundamental goal of a green bond is to create positiveimpact alongside competitive financial returns. Greenbond investors should have a clear understanding of abond’s impacts in order to align these with their overallESG objectives and strategies. For example, investors thathave certain carbon performance standards shouldconsider whether or not a bond’s KPIs effectively trackand quantify GHG emission reductions. Similarly, investorslooking for socially focused positive impact need todetermine whether the bond outcomes are in line withtheir own social impact goals.

In order to provide such information to investors,issuers should define performance measures/KPIs andspecify the process of measuring and monitoringoutcomes at the outset. In many cases this will be achallenge, especially in measuring social impactoutcomes. However, even if challenging and at times

imprecise, measuring impact is animportant aspect.

Investors should expect periodicreports to be published by issuers,highlighting outcomes and impacts ofprojects and providing an indication ofenvironmental and social return ontheir investments. Typically, issuersdisclose outcome/impact informationannually in their sustainability reports orannual reports. Some issuers maychoose to report more frequently while

others may commit to provide interim project allocationreports until actual impacts can be effectively quantifiedand reported. Investors should welcome and encourageas much disclosure as possible so that the impact andoutcomes are transparent.

ConclusionThe green bond market will continue to grow anddiversify, driven largely by investor demand for investmentopportunities that deliver positive impactalong with competitive returns. Thisimportant trend presents both newopportunities and new challenges forinvestors. As outlined above, in order forinvestors to be confident that a greenbond will deliver positive impact, theyshould seek to understand:• What qualifies as green? Investor

should seek a clear formulation ofthe issuer’s impact goals as well ascredible, detailed eligibility criteria forthe use of proceeds;

• What systems are in place to ensureeffective management of proceeds? Investors shouldseek evidence of strong and transparent systems andprocesses to, select projects and manage proceeds;

• What are the actual impacts of a bond? Investor needto know whether, over time, a bond is achieving itsimpact goals. This requires that issuers measureimpacts and report on them at least annually.

In all of these areas investors will gain confidencefrom greater transparency and from third-partyverification.

In assessing opportunities in the green bond market,investors should recognize that this market is young andrapidly evolving, and in some areas best practices are stillemerging. There is a role for investors to play inencouraging best practices in management and reportingwith the ultimate goal of enhancing the positive impactthat green bonds can have.

Vikram Puppala supports the advisory services team in the management and delivery of client projects. He also conductsupdates to the S&P/TSX Clean Technology Index. Vikram comes to Sustainalytics with extensive experience in business,analytics and operations. He previously worked at Rabobank’s Canadian leasing division as a clean technology financemanager. While completing his MBA, he was managing director at YSEC, a student-run sustainability consulting firm. At YSEChe worked on various projects ranging from drafting sustainability strategies to carbon footprint measurement. In his freetime, Vikram volunteers as a newsletter coordinator for Give Green Canada, a non-profit organization that helpsenvironmental NGOs with their fundraising efforts. Vikram has an MBA from the Schulich School of Business with aspecialization in Business and Sustainability and a graduate diploma in Business and Environment. Vikram is also ProjectManagement Professional certified and holds a master’s degree in Industrial Engineering from the University of Florida.

“The green bond marketwill continue to growand diversify, drivenlargely by investordemand for investmentopportunities thatdeliver positive impactalong with competitivereturns ”

“ investors looking forsocially focusedpositive impact needto determine whetherthe bond outcomes arein line with their ownsocial impact goals ”

The Relevance of Issuer ESG PerformanceGreen bonds are primarily about the positive impact of particular projects. As such, when investors consider corporateissuances, the ESG performance of the issuer is not, and should not be, their primary focus.

However, responsible investors with established approaches to embedding ESG considerations into their investmentprocesses can be expected to take the ESG performance of the issuer into account, alongside the credentials of the bond.Understanding a company’s ESG performance improves an investor’s understanding of management quality andeffectiveness, and major controversies or poor ESG performance may raise questions about a company’s ability to managebond proceeds effectively and to deliver environmental or social benefits. Furthermore, institutional investors are likely toattend to issuer ESG performance because investing in bonds issued by companies with major controversies may posereputational risk to the investor.

To date, most corporate green bonds have been issued by companies with relatively strong ESG performance.However, as more corporate issuers enter the green bond market, the question of their overall ESG performance is likelyto become more relevant.

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A well-designed benchmark seeks to represent a particularmarket accurately, providing a clear measure of asset classrisk and return and a transparent framework for definingan investment choice set when making allocationdecisions.

A key challenge in constructing a Green Bond index isto set specific, transparent, and objective rules to identifywhat investors classify as “green” (with a clear netenvironmental benefit) and, therefore, consider part oftheir investment choice set. Barclays and MSCI conductedconsultations with a diverse set of index stakeholders(including issuers, asset managers, asset owners, and

consultants) to solicit feedback on index design andmethodology and pinpoint the emerging norms in thedefinition of green bond investing and the differentinterpretations that investors may have.

One clear theme that came out of these consultationswas the importance for this universe to be evaluated anddefined independently from issuers to add a layer ofintegrity above and beyond self-labelled designations thathave not been vetted. With some issuers already pushingthe limits of what can be considered green, the practice of“greenwashing” is seen by many investors as a seriouspotential threat to the credibility of this budding market.

Catalyzing changeDefining a benchmark indexfor the green bond market

Christopher Hackel, Vice President,Benchmark Index Research Group, Barclays

Laura Nishikawa, Vice President and Head of Fixed Income ESG Research, MSCI

Acritical step in a new security type’s transition into a formal asset class is the availability of a transparentbenchmark index to measure it. Earlier this year, Barclays and MSCI jointly announced plans for a GreenBond index, with the objective of facilitating this transition and creating a new market standard for

green bond investors. While still a sprout within global capital markets, the green bond market is rapidly growing, with projected issuance of

$40bn for 2014 (a four-fold increase from the previous year) and $100bn for 2015 . In just three years, “green” has gonefrom a characterization of a handful of development bank and supranational bonds to the description of a burgeoning newasset class with an increasingly diverse issuer and investor base.

The rapid growth of this new market has necessitated the establishment of clear and broadly accepted guidelines forthose issuing and evaluating green bonds. Earlier this year, a consortium of banks published an initial set of Green BondPrinciples to help define the market from an issuer’s perspective. Absent a market-standard definition of “greenness”,however, most green bonds remain self-labeled by their issuers. Benchmark indices are an important evolutionary step toprovide further transparency to a market, giving investors a means to evaluate performance and assess risk.

BARCLAYS MSCI GREEN BOND INDICES

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Defining the Green Bond Market For the Barclays MSCI Green Bond Index, securities areindependently evaluated by MSCI ESG Research along fourdimensions to determine whether a fixed income securityshould be classified as a green bond. These eligibilitycriteria reflect themes articulated in the Green BondPrinciples and require clarity about a bond’s: • Stated use of proceeds;• Process for green project evaluation and selection;• Process for management of proceeds; and• Commitment to ongoing reporting of the

environmental performance of the use of proceedsThese criteria will be evaluated for both self-labelled

green bonds and unlabelled bonds for potential indexinclusion. So long as projects fall within an eligible MSCIgreen bond category and there is sufficient transparencyon the use of proceeds, a bond can be considered for theindex even if it is not marketed as green.

1. Eligible Use of ProceedsMSCI ESG Research has established a detailed taxonomy ofqualifying green bond projects and activities, founded ondecades of experience in environmental research andsubjected to periodic independent feedback and review.Eligible green bonds are selected based on theenvironmental benefits of their use of proceeds (net ofenvironmental costs) and must fall into at least one of fivebroad categories: 1) Alternative Energy; 2) EnergyEfficiency; 3) Pollution Prevention and Control; 4)Sustainable Water; and 5) Green Building. Theseclassifications are not mutually exclusive, and a greenbond’s use of proceeds may qualify for multiple categories.Within each of these categories, further subcategoriesallow for more granular classification of use of proceeds.

General purpose bonds are also considered eligible ifgreater than 90% of the issuer’s activities (as measured byrevenues) fall within one of these eligible environmentalcategories.

For index eligibility, each bond is reviewed againstthese categories at issuance to determine whether the useof proceeds qualify for Green Bond designation. Even withdetailed MSCI definitions, grey areas exist within each

category for certain investors. Throughout the consultationperiod, we encountered investors of varying “shades ofgreen,” with some applying more stringent criteria forgreen bond classification, while others are more inclusiveof any efforts demonstrating a net environmental benefit.

2. Process for Project Evaluation and SelectionTo be classified as a Green Bond for index purposes, thebond’s prospectus or supporting documentation (eg,green bond supplement) must clearly delineate the specificcriteria and process for determining eligible projects orinvestments. Most of the green bonds issued in 2014would qualify under this requirement, but our consultationuncovered concerns among investors surroundingimprecise language that leaves excessive discretion to theissuer (eg, the inclusion of an “other efforts” category in abond’s project selection guidelines).

Third-party second opinions provide added credibilityto the market and are encouraged by most investors. Butwith less than 60% of green bonds since 2013 solicitingthird-party review, and given the absence of consistentexternal standards for third-party reviewers, the consensusof the consultation was that third-party review, whileencouraged, should not be an explicit index requirementat this time. Furthermore, investors expressed the viewthat a second opinion is not sufficient for Green Bondindex eligibility in the absence of necessary informationfrom the issuer.

3. Process for Management of ProceedsA green bond issuer must also disclose its method andprocess for ring-fencing and/or managing net proceedsearmarked for green bond projects, for instance throughrecourse to eligible revenues or assets, the creation of aseparate legal entity, the creation of a sub-portfolio, orother auditable means. Again, verification of this processby an external auditor is preferred but not required.

4. Requirements for Ongoing Reporting onEnvironmental benefitsLastly, given that transparency and traceability are amongthe most salient and innovative features of this market, we

FIGURE 1 MSCI Green Bond Use of Proceeds Categories - Summary

Green Bond Category Sub-Category

Alternative Energy Wind, Solar, Geothermal, Biomass, Waste Energy, Wave Tidal, Small Hydro (<25MW), Biodiesel,Biogas, Cellulosic Ethanol

Energy Efficiency Demand-Side Management, Battery, Fuel Cells/Hydrogen Systems, Smart Grid, Nano-Tech, Other Energy Storage, Household Products, Superconductors, Natural Gas Combined Heat & Power,LED Lighting, Compact Fluorescent Lighting, Insulation, Advanced Materials, Hybrid/ElectricVehicles, Advanced Design, Clean Transport infrastructure, Industrial Automation, Environmental IT,Optimization Technologies

Pollution Prevention Environmental Remediation, Waste Treatment, Reuse & Recycling of Waste, Low Toxicity/VOC, & Control Conventional Pollution Control

Sustainable Water Water Infrastructure & Distribution, Rainwater Harvesting, Smart Metering Devices, Drought-resistant seeds, Desalinization, Waste Water Treatment

Green Building Green Certified Properties (ie LEED, Energy Star, NABERS, BREEAM, etc.), Uncertified Green PropertyInvestments (top 15% energy efficiency within local market)

Source: MSCI ESG Research

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require that issuers report at least annually on theenvironmental performance of a green bond’s use ofproceeds. The contents of reporting may vary and caninclude details on specific projects, funds disbursed byaggregate project types, or quantitative environmentaltargets and performance metrics. A key design feature ofthe Green Bond Index is that failure to report on use ofproceeds can result in removal from it.

Overlaying Additional ESG criteria in Green Bond Eligibility RequirementsA final question addressed during our consultation waswhether investors are willing to accept a green bond froman issuer with a poor environmental, social, orgovernance (ESG) track record. Some believe that “dirty”issuers could have an incentive to shift their capitalallocation if they can more readily attract capitalearmarked for green invest ments. For others, there maybe at least some discomfort with buying green bondsfrom an egregious polluter.

To construct a representative index of the green bondmarket, the standard Barclays MSCI Green Bond index willnot set any minimum thresholds based on issuer-level ESGdata, but customized index variants are possible to meetan investor’s individual needs (eg, excluding issuers withan ESG rating below B or excluding issuers with ties tonuclear power).

Fixed Income Index Eligibility Criteria forGreen BondsOnce a security has met MSCI’s criteria for classification asa green bond, additional fixed income eligibility rules areapplied to ensure that the final benchmark index isrepresentative of the market being measured andreplicable for investors. Many of the fixed income indexrules in place for the Green Bond Index mirror eligibilitycriteria used for widely used broad market benchmarkssuch as the Barclays Global Aggregate Index.

SectorCorporate, government-related, and securitized bonds areeligible for the Green Bond Index, provided they meet all

other eligibility criteria. Current index eligible issuance isprimarily from government-related (ie, supranational) andcorporate issuers, but asset-backed securities (ABS) withgreen underlying collateral may also qualify. Taxablemunicipals would be eligible for the Green Bond Index,but tax-exempt securities are not.

Currency DenominationTo represent a global market, all local debt marketstracked by the Barclays flagship Global Aggregate Indexare eligible for the multi-currency Green Bond Index.Eligible currencies must meet a variety of criteria,including being investible, eg, having an established anddeveloped forward or non-deliverable forward (NDF)market, and being freely tradable and convertible,consistent with Barclays flagship Aggregate indices. Atindex launch, bonds denominated in seven different localcurrencies qualify for the index.

Minimum Issue SizeTo promote investability, the Green Bond Index will havethe same minimum amount outstanding as the flagshipBarclays Global Aggregate and US Aggregate Indices,which are set for each local currency based on market-specific issuance patterns and benchmark issuance sizes.The minimum issue sizes of the four largest index-eligiblelocal currency markets are USD250mn, EUR300mn,GBP200mn, and CAD300mn, respectively.

Early green bond issuance tended to be in smallerdenominations, but average issuance size has been quicklyincreasing as the green bond market evolves. Establishedissuers are issuing in larger sizes, and new issuers arecoming to the market with substantially sized issues,which are often oversubscribed.

Credit QualityThe green bond Index includes only investment-gradebonds with a credit quality rating of Baa3/BBB- or higherusing the middle rating of Moody’s, Fitch, and S&P. Greenissuance thus far has been predominantly frominvestment-grade issuers.

FIGURE 2 Barclays MSCI Green Bond Index by Sector

Sector Count Market Market Yield to OAD OAS ESG Index Value (%) Value ($ bn) Worst Quality Rating

Govt-Related 24 62.3 20.0 0.88 4.98 31 AAA/AA AAA/AA1

Agency 8 22.9 7.3 0.88 5.18 44 AA/A AA2/AA3

Local Authority 3 5.6 1.8 2.12 12.20 62 NR AA2

Supranational 13 33.8 10.8 0.68 3.64 17 AAA/AA AAA

Corporate 16 36.2 11.6 2.47 7.27 111 A/BBB A3/BAA1

Utility 11 27.6 8.8 2.65 7.75 122 A/BBB A3/BAA1

Financial 5 8.6 2.7 1.92 5.73 77 AA/A A2/A3

Securitized 1 1.5 0.5 0.78 1.52 38 NR AAA

ABS 1 1.5 0.5 0.78 1.52 38 NR AAA

Total 41 100.0 32.0 1.46 5.76 60 AA/A AA2/AA3

Source: Barclays Research, MSCI ESG Research. Note: Data as of September 2014

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CouponThe index includes only fixed-rate securities.

MaturityUnlike other Barclays Aggregate bond Indices, the GreenBond Index does not have a 1-year minimum time tomaturity and will hold bonds until final maturity.

Issuer CapsThe flagship Barclays MSCI Green Bond Index is an un -capped benchmark, but capped or diversified indices withexplicit issuer caps or diversification rules can be created.

SummaryAs sustainability continues to grow as an issue of investorconcern, so does the market for bonds intended to have

a net positive environmental effect, facilitating thetransition to a low carbon economy and funding theinfrastructure adaptations necessary for sustainableenvironmental change. What started as a market forproject-specific financing for supranationals has grownconsiderably as a source of capital for corporate andgovernment-related issuers offering greateraccountability on the environmental effect of theirbusiness activities.

The growth of this security type and form of capitalraising has led to increasing acceptance of the greenbond market as a distinct asset class for investors toinclude in their bond portfolios. Climate- andenvironmentally themed investors have long beenproponents of green bonds as a means of expandingtheir investment choice set. But as the investor base forsuch bonds broadens and diversifies, there is anincreasing call for standardization and transparency inthe market. The Barclays MSCI Green Bond Index isintended to facilitate this transition and bring increasingclarity to the risk and returns of this asset class for abroad set of investor types.

We expect further innovation and standardizationwithin the green bond market as the asset class matures.As such, we expect the Barclays MSCI Green Bond Indexto evolve with future market developments andformalization of investment standards andaccountability. We will continually seek and welcomefeedback from investors willing to share theirperspectives on how they view the asset class to ensurethat this new index family can be a useful tool in theirportfolio management process.

FIGURE 4 Top 5 issuers by market value for simulated Green Bond Index

Ticker Description Sector # Bonds Market Market ESG QualityValue ($ bn) Value (%)

EIB EUROPEAN INVESTMENT BANK Supranational 4 5.5 34.8% AA

GSZFP GAZ DE FRANCE Utility 2 3.5 21.7% A

IFC INTERNATIONAL FINANCE CORP Supranational 3 2.5 15.8% AAA

BRKHEC TOPAZ SOLAR FARMS LLC Utility 3 2.3 14.6% BB

IBRD WORLD BANK (IBRD) Supranational 4 2.1 13.0% AA

Source: Barclays Research, MSCI ESG Research. Note: Data as of September 2014

FIGURE 3 Barclays MSCI Green Bond Index by Currency

Currency Count Market Market Value % Value ($ bn)

EUR 13 54.4 17.4

USD 18 30.6 9.8

CAD 4 5.1 1.6

GBP 2 4.3 1.4

SEK 2 3.4 1.1

CHF 1 1.3 0.4

AUD 1 0.9 0.3

Total 41 100 32.0

Source: Barclays Research, Data as of September 2014

Christopher Hackel is a Vice President in the Benchmark Index Research group at Barclays, based in New York.Mr. Hackel joined Barclays in 2008 from Lehman Brothers where he was responsible for implementation and support of a

variety of index replication strategies. Prior to that, he held positions at UBS as an analyst/developer in Fixed IncomeQuantitative Research and as an analyst in Whole Loan Trading.

Mr. Hackel graduated with a BS in Computer Science from Syracuse University.

Laura Nishikawa is Vice President and Head of Fixed Income ESG Research for MSCI. In her role, she focuses onenvironmental and social risk and opportunity in the fixed income space, leading a team that researches unlisted corporate,government-related, sovereign, and supranational issuers. She chairs MSCI’s ESG Ratings Methodology Committee, and ledMSCI’s content and product design contributions to construct the Barclays MSCI ESG Fixed Income Indices.

Prior to joining Innovest, now part of MSCI, in 2008, Ms Nishikawa conducted macroeconomic research with the UnitedNations Development Program, and conducted research studies on political behavior through McGill University.

Ms Nishikawa holds a Masters degree in International Economic Policy from Columbia University (SIPA), a Bachelorsdegree from McGill, and is a CFA charterholder.

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IntroductionOver $3.1bn of clean energy project bonds were issued in2013, a 53% increase from 2012. Nearly a third of thetotal volume was attributable to a single project, a $1bnissue backed by the 580MW Solar Star PV project, ownedby US-based Berkshire Hathaway Energy. Issuance has beenslow thus far in 2014, but a recent portfolio bond offeringby US-based Exelon backed by 13 wind farms pointstowards a likely path forward for the renewables projectbond market. As the pipelines of European and US-basedlarge-scale onshore wind and PV projects slow down,issues backed by multiple smaller projects could prove tobe a growing source of renewables project bond volume.

BackgroundProject bonds – also known as infrastructure bonds – arebonds backed solely by the cash flows generated from anunderlying project or portfolio of projects. The bonds mayor may not be secured by the assetsthemselves (secured meaning that, in thecase of default, investors have at leastsome chance of recouping a piece of theirinvestment through the sale of projectassets). Project bond investors also, bydefinition, have no recourse to the coffersof the project’s sponsors as the projectitself would have been established as astandalone special purpose vehicle.

Traditionally the project bond markethas been dominated by privately placedissues, meaning that project bonds arenot sold directly to retail investors, but rather to qualifiedinstitutional investors. The main advantage of issuingprivately placed debt is that it decreases both the cost ofissuance and the public disclosure requirements inherentwith a retail offering. Furthermore the industry is highlyconcentrated in the US and Canada, Western Europe andAsia.

Recent history & comparison to broaderinfrastructureClean energy project bond issuance began to pick up in2010, when nearly $2bn of bonds came to market – drivenby bonds issued for the Alta Wind and CaithnessShephards Flat wind projects in the US and SunPower’s

Growth of theproject bondmarketJoseph Salvatore, CFA, Senior ResearchAssociate, Bloomberg New Energy Finance,New York

“Project bonds – alsoknown as infrastructurebonds – are bondsbacked solely by thecash flows generatedfrom an underlyingproject or portfolio ofprojects ”Figure 1 - Clean energy project bond issuance by type ($m)

Source: Bloomberg New Energy Finance. Note: also includes US municipal revenue bonds

3,500

3,000

2,500

2,000

1,500

1,000

500

02003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Wind Solar Biomass Biofuel Transmission Geothermal

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Montalto di Castro PV project in Italy. Prior to 2010issuance was sparse and lumpy and dominated mostly bylarge geothermal project bonds, with the exception of thehuge Breeze Wind series. The $1.5bn Breeze portfolio ofFrench and German wind farms came to market from 2003to 2008 and did not succeed in promoting investorconfidence in renewable project bonds. The series sufferedrating downgrades due to inaccurate estimates of windresources at portfolio project sites. The 2006 Alte Liebe IGerman wind portfolio bonds experienced a similardowngrade fate, and were just affirmed at a CCC+ ratingby S&P with a negative outlook. These combinedexperiences seem to have hampered growth in theEuropean clean energy project bond space: issuance since2010 has been primarily focused in the US.

Uncertainty about resource estimates and the inherentintermittency of renewables has played a part in keepinginvestors at bay. However, ratings agencies have grownmore adept at assessing project productivity, and newdevelopments in resource measurement technology havehelped estimates become more accurate.

As a percentage of total project finance – the methodof financing projects that involves the creation of adedicated bankruptcy-remote company to finance anddevelop a project – renewable energy accounted for 18%of total volume in 2013; as a percentage of total projectbond volume, it accounted for 12%, down slightly from itsshare in 2012 (Table 1).

Why issue a clean energy project bond?The European credit crisis prompted lenders to re-evaluatetheir long-dated loan portfolios, causing some of Europe’sbanks - historically among the most active renewableproject finance providers - to pull back from projectfinancing activities altogether. In some cases this meantoffloading their project finance loan portfolios, likely tobetter capitalized banks like those in Japan; in Q4 2011 theBank of Ireland sold $781m worth of project finance loansto Sumitomo.

For those banks still active in the space there waspressure to pull back on the types of long-dated 12year+loans once available to project developers and movetowards shorter term loans, commonly referred to as mini-perms or semi-perms. These shorter 5-7 year loans don’talign with the longer term 20 year+ lifespans of a typicalwind or solar project, meaning that developers needed torefinance and roll their loans every few years, exposingthem to interest rate risk.

These events helped encourage project developers toinvestigate alternative debt funding sources; pushingsome projects out of the traditional 70% commercialbank loan, 30% equity funding split. For some developerscapital markets offer an attractive solution: the potentialto source debt funding for clean energy projects directlyfrom institutional investors such as pension funds andinsurance companies while locking in a long-term, fixedinterest rate.

Market conditions are also driving clean energy projectbond issuance: low prevailing interest rates areincentivizing borrowers to look towards the bond market inan effort to lock in long term, low fixed interest rates.Meanwhile on the buyside investors are hunting for yieldand looking at the clean energy project bond market as anoption, viewing the space as having relatively high yieldsgiven the level of risk involved.

There are a number of advantages to project bonds,include the following:• Lock in a fixed interest rate• Refinance higher cost construction or mezzanine debt

at lower rates for the long term • Reduce the refinancing risk associated with rolling

short-term commercial loans • Free up credit lines at commercial banks in order to

facilitate additional project development

Key recent project bondsUS-based Berkshire Hathaway Energy (formerly known asMidAmerican Energy) led the project bond charge in2013, issuing a $250m bond for its Topaz PV project(following up on $850m issued for the same project in2012) and a benchmark $1bn bond to finance the SolarStar PV plant (previously known as Antelope Valley),which it acquired from SunPower Corp earlier in the year.Exelon, a US utility with a large wind portfolio, jumpedinto the market with a $613m senior secured bond inSeptember backed by 667MW of wind from 13 differentprojects across Idaho, Kansas, Michigan, Oregon, NewMexico and Texas. Table 2 summarizes all key clean energyproject bond offerings in 2013.

Table 1: Clean energy project finance and bond financeversus other infrastructure Space Type 2011 2012 2013

Project financing Other infrastructure ($bn) 210 151 245

Clean energy ($bn) 73 51 43

Total ($bn) 283 202 288

Clean energy, % total (%) 34.6% 33.6% 17.6%

Project bonds Other infrastructure ($bn) 5.80 14.85 26.87

Clean energy ($bn) 2.20 2.15 3.13

Total ($bn) 8.00 17.00 30.00

Clean energy, % total (%) 38.0% 14.5% 11.7%

Source: Bloomberg New Energy Finance, Infrastructure Journal

Figure 2 - Clean energy project bond issuance by project location ($m)

Source: Bloomberg New Energy Finance. Note: also includes US municipal revenue bonds

3,500

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02003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Continental Europe US Canada Mexico UK South Africa

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Two UK-based renewable infrastructure funds soldbonds to finance or re-finance portfolios of UK-sited PVprojects: Foresight Group and the Renewable FinancingCompany. Also from the UK came a first-of-a-kind offshorewind transmission bond wrapped with a partial guaranteefrom the European Investment Bank as part of the EU’s2020 Project Bond Initiative. The bond finances the GreaterGabbard Offshore Transmission Link, bringing power fromthe 504MW Greater Gabbard offshore wind farm to theUK mainland grid. The EIB guarantee enabled the deal toobtain an A3 credit rating from Moody’s, letting it lock in arelatively low 4.14% coupon for the 19-year maturity.

InvestorsDemand for clean energy project bonds is driven mostly byinsurance companies, pension funds and privatelymanaged infrastructure investment funds. The insuranceand pension industries are attracted to the asset class dueto long tenors (20+ years) and stable cash flows, which fitwell within their asset-liability matching investmentapproach. This technique dictates that the duration of acompany’s portfolio should roughly match the duration ofits liabilities – a duration that is quite long in the case of life

insurance and retirement benefit plans. We estimate thatthere are about 20-25 large players on the demand side inthe US.

Insurance companies are typically the most commonholders of project bonds – both renewable and otherwise –due to the long-dated nature of the investments, whichpair with their liabilities. Holdings data is available for$2.7bn of the $7.1bn worth of clean energy project bondsissued since 2011, or about 40% of issuance.

UnderwritersCitigroup secured the top underwriting position in 2013with 3 deals for nearly $800m in allocated underwritingcredit. The bank was involved in the Topaz secondplacement, the Solar Star project and Continental Wind.Citi along with Barclays and RBS have participated in fourdeals together since 2012: the initial Topaz deal ($850m),the Topaz follow-up ($250m), Solar Star ($1,000), andContinental Wind ($613).

Table 2: Key project bond issuances since January 2013Project Technology Country MW Date $m Notes

Comber Wind Canada 166 Feb 13 440 25 + investors

Westmill Solar PV UK 7 Feb 13 19 Community-owned solar cooperative; debtCooperative sold to a pension fund

Topaz II PV US 586 Apr 13 250 Follow up to $850m Topaz I bond (issued in Feb 2012)

Soitec CPV South Africa 44 Apr 13 112 First renewable project bond in South Africa

Solar Star (previously PV US 579 Jun 13 1,000 Owned by Berkshire Hathaway Energy (as withAntelope Valley) Topaz PV); largest renewable project bond ever

Foresight Group PV UK 16 May 13 91 Refinancing part of Foresight’s UK portfolio

Continental Wind Wind US 667 Sep 13 613 Portfolio of 13 Exelon-owned projects

Greater Gabbard Transmission UK 497 Nov 13 496 First offshore wind transmission link bond, EIB Offshore Link Project Bond credit enhancement

Renewable Financing Co PV UK 20 Dec 13 108 Backed by six solar parks in the UK

Source: Bloomberg New Energy Finance

Table 3: Top reported holders of clean energy project bonds

Investor Country Activities $m

AIG United States Insurance 630

Northwestern Mutual United States Insurance 261

MetLife United States Insurance 202

John Hancock United States Insurance 182

Allstate United States Insurance 160

ING Netherlands Insurance 156

Allianz Germany Insurance & financial 134

Variable Annuity Life United States Insurance 113

Hartford Canada Diversified financial 80

New York Life Group Canada Asset management 75

Source: Bloomberg New Energy Finance, Bloomberg Terminal. Note: data from reported holdings and represents only a portion of total issuedvalue, data as of Q1 2014

Figure 3 - Top project bond underwriters, 2013 ($m, deals)

Source: Bloomberg New Energy Finance, company filings. Note: Joint-leadunderwriters are allocated equal portions of each issue, data for some deals isunconfirmed by underwriters due to nature of private placement deals.

Citigroup

Barclays

RBS

Scotia

HSBC

Santander

Independent DebtCapital Markets

Standard Bank ofSouth Africa

Other

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8

7

6

5

4

3

2

1

0

0 1 2 3 4

0 100 200 300 400 500 600 700 800 900

Value ($m) Deals

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Ratings criteria (risks)Four ratings agencies –Moody’s, Fitch, S&P and DBRS(predominantly for Canadian projects) – have developedratings criteria for renewable project bonds. While anumber of key risks are outlined in each of their criteriadocuments, three risks are most salient: completion,resource and revenue risk. Below is a discussion of each ofthese three:

• Completion/construction risk - Ratings agenciesscrutinise every unfinished project to determine the riskthat the project may not be completed on time or onbudget. Due to the criticality of this risk and itspotential ratings impact, many projects issue bondsonly after their commercial operation date has beenachieved or once a sizeable portion of construction hasalready been completed. Fitch takes the view that PV projects have the lowestcompletion risk of any renewables type, followedclosely by onshore wind. Geothermal and concentratedsolar projects present greater risk, according to theagency. The involvement of a reputable developer helpsdefray this risk.

• Resource risk - Recent evolutions in monitoringtechnologies have decreased the uncertaintysurrounding the variability of insolation and wind. Still,without a 10-year or longer sampling period, it isdifficult to confidently ascertain the annual productivityof any project site. Ratings agencies assess the riskiness of projectstypically by running P50, P90 and P99 productivityanalysis over various periods, usually of either one or10 years. (These terms, also known as exceedanceprobabilities, refer to the probability that a given plantwill exceed a given productivity level a certainpercentage of the time. Thus a P90 indicates that aproject is likely to exceed the specified productivity level90% of the time, while a P50 would indicate the samefor 50% of the time. The higher the number, the moreconservative the analysis. P90 is a typical base case.)Once a probability benchmark is established, theagency runs a financial analysis using the project’sofftake price and operational cost inputs, to eventuallyarrive at a debt service coverage ratio (DSCR). The DSCRserves as the basis for the assessment of the financialrisk of the operating project.

• Offtake/revenue risk - A high-quality signed powerpurchase agreement (PPA) is essential to the issuance

of a clean energy project bond. Typically the tenor of aproject’s bond will end concurrently or close to the enddate of the PPA to minimise the risk of operatingwithout contracted revenues (Figure 4). The perceptionof feed-in-tariff risk (especially that of retroactive tariffcuts in Europe) has hampered development of therenewables bond market there. Fitch specifically cites ahistory of retroactive regulatory changes in theproject’s market as an indicator of a weak projectstructure. Two other risks cited frequently by the agencies, though

not as critical as the three above, are technology risk andstructural/financial risks:• Technology risk – Agencies take into account the

operational history of the technology being applied,which includes the reputation of the manufacturersand installers. Wind and PV-cSi are on the low end ofthe technology risk spectrum, while concentrated solarand new types of non-cSi PV are viewed as higher risk.Manufacturers involved in the projects in Error!Reference source not found. include First Solar andKyocera for PV and Acciona, GE and Vestas for wind.

• Structural/financial risk – This includes the financialstructure, covenants, size and strength of reservefacilities and general financial stability of the project(including resilience in the face of stressed cash flows).

Joseph Salvatore leads Bloomberg New Energy Finance’s Capital Markets and Clean Energy Economics research and is basedin New York. Joseph is responsible for BNEF’s levelised cost of energy (LCOE) analysis, the company’s proprietary LCOE modeland for coverage of developments in clean energy project finance including green bonds, yieldcos and listed infrastructurefunds. He also covers the performance of publicly traded companies across the clean energy sector and the funds that investthem through regular research notes with a focus on the NYSE BNEF co-branded family of clean energy indexes and theWilderhill NEX Index.

Prior to this Joseph was on the team responsible for implementing product integration after Bloomberg’s acquisition ofNew Energy Finance in 2010 and previously worked as a senior data analyst for energy and environmental markets withBloomberg.

Joseph holds undergraduate degrees in French and Finance from the University of Pittsburgh and is a CFA charterholder.

Figure 4: Clean energy project bondsmaturities vs PPA length (years)

Source: Bloomberg New Energy Finance Notes: For DOE loan guarantee projects:(G)- tranche is guaranteed by the DOE (U)- tranche is unguaranteed by DOE

Genesis (U)

Comber

St. Clair

Oaxaca IV

Oaxaca II

L’Erable

Granite Reliable Power

Granite Reliable Power

Mount SIgnal

Desert Sunlight (U)

Desert Sunlight (G)

Arlington Valley II

Genesis (G)

Topaz

0 5 10 15 20 25 30

Bond Tenor PPA Length

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The fledgling green bond market of 2007/08was small and initial growth extremelymodest but that has changed during the last

two years which have witnessed a remarkablesurge in new issues and demand. New players haveentered the market including several corporatesand municipalities. That’s great! The demand forgreen bonds has increased and as a result most thenew bonds have been several timesoversubscribed. It is easy to see why. Manyinvestors are looking for investments whichsupport environmental friendly projects orstimulate the transition towards a low-fossil-fueleconomy. Green bonds are attractive investmentsfor investors looking for ways to integrate ESG intotheir fixed income portfolio.

But are green bonds just good? What are the prosand cons for investors?

Obviously risk-adjusted return on any investment hasto be attractive in order to make investors interested. Veryfew investors, if any, have the mandate to invest just “todo good” because they need to fulfill their fiduciary dutyand invest to achieve a specific level of return to a definedrisk level for their beneficiaries. But if investors can findinstruments that give an attractive risk-adjusted return atthe same time as “doing good”, then it is a win-winsituation that is easy to buy into.

In the beginning green bonds were issued bymultilateral development banks and financial institutionslike the World Bank and EIB. Those bonds had high creditratings (AAA) and gave a rate of interest that was slightly

higher than similar ordinary bonds. In other words thebonds offered an attractive risk-adjusted return at thesame time that they “did good” by financingenvironmental friendly projects. Demand frommainstream investors was quite limited but has changed in recent years.

Limited secondary marketThere are some obstacles with green bonds. The first isliquidity because the secondary market is very limited. For

Christina Kusoffsky Hillesöy, Head of Responsible Investments, Asset Management, Länsförsäkringar AB

Green bonds aregreat investmentsbut be aware of green washing

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many investors this is a clear disadvantage and it gives along term lock-in into an investment which might not bedesirable at all times. The recent market growth in thenumber and size of issues has made the secondary marketbigger, which is definitely a positive, but it still presents arelatively small market.

Risk of green washingThe second obstacle is the risk of green washing. How canan investor be sure that the projects that are beingfinanced by the green bond are green? What if greenprojects turn out not to be green? And what if it turns outthat the proceeds from the green bonds in the end arefinancing other projects other than the supposed greenones? Green washing creates a reputational risk for both

the issuing company and the investor.The recent development of new

issuers such as corporate andmunicipality green bonds have madethe risk for green washing larger. Manyinvestors have felt secure with greenbonds issued by well-known multilateraldevelopment banks and financialinstitutions such as the World Bank andEIB because they have robust internalprocedures and routines for selectinggreen projects. But do new players on

the market have the same capabilities to identify, selectand monitor green projects?

And is a there a risk of green washing when a greenbond issued by a company that runs an environmentallyunfriendly business but where the green bond proceedswill be financing a specifically green project? One couldargue that it is better to encourage that company to movethe business towards a greener more environmentalfriendly business and in that case the green project wouldbe a step in the right direction. But there might be areputational risk for the investor if it is associated with acompany that has a bad track record when it comes toESG, or where its main business is not environmentallyfriendly. However, what one investor considers a greeninvestment will most probably differ from anotherinvestor’s view and it’s not a case of one size fits all.

Checklist to reduce the risks of greenwashing

So what can an investor do to reduce the risk of investingin projects that might turn out to be green washing?There are some simple steps that an investor can take:

• Ask the issuer to disclose processes and criteriasused for identifying green projects beforehand. Theissuer should explain the methodology used forselecting green eligible projects.

• Engage in a dialogue with the issuers and discussESG risks and opportunities. It is useful for the issuerto have an ongoing dialogue with investors tounderstand what ESG risks investors worry and careabout.

• Ask the issuer to have a third party provider toreview the process for selecting the green projects.Having an independent second opinion doesn´t give aguarantee that selected projects will be green in theend but it gives the investor at least some sort ofguarantee that the company or organization has amethodology and processes in place to evaluate andselect green projects. So far the Norwegian Cicero(Center for International Climate and EnvironmentalResearches) has been the most popular source of thirdparty verification but there will probably be manymore suppliers offering this service in the future.

• Ask the issuer how proceeds from green bonds arehandled to make sure that they are earmarked toguarantee that they are used for financing greenprojects. In other words, the issuer of the green bondshould have a segregated account to make sureproceeds go to green projects and are not mixed upwith other projects.

• Last but not least ask for transparency and reporting.The issuer should also have a system in place formonitoring the project. Disclosure isessential to give the issuer and thegreen bond credibility.

I am convinced that the green bondmarket will continue to grow and thatmany interesting green projects will befinanced that way. I just hope we don’tend up seeing the market hurt by green washing.

“How can an investor besure that the projectsthat are being financedby the green bond aregreen? What if greenprojects turn out not to be green? ”

“ I just hope we don´tend up seeing themarket hurt by greenwashing ”

Christina Kusoffsky Hillesöy joined Länsförsäkringar in 2014 as Head of Responsible Investments, Asset Management. Sheis responsible for developing and integrating a responsible investment strategy.

Prior to joining Länsförsäkring she worked as Head of Communications and Sustainable investments at the Third SwedishNational Pension Fund (AP3) where she was responsible for external and internal communications as well as the fundssustainable investment strategies. She was also chairwoman of the Ethical Council, a joint collaboration between The First,Second, Third and Fourth Swedish National Pension Funds.

Christina holds a Bachelor of Science degree in international marketing from the University of Stockholm, Sweden and ahave since then studied political science, journalism and sustainability.

Both Länsförsäkringar and AP3 were early investors in green bonds. Länsförsäkringar has invested in the World Bank and EIB. Christina has been in dialogue with several issuers regarding ESG risks and investor expectations on green bondssince 2008.

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Responsible investment and climate changeClimate change is real. Adapting to it, and mitigatingfurther change, are vital challenges for societiesworldwide. Changes to the planet’s weather and watersystems and to biodiversity can have severe impacts onlocal, regional and global economic systems. Thisrepresents a potential danger, now and in the future, toour investments. As owners of companies and lenders tocompanies, governments and agencies, investors do havea responsibility to take.

In order to prevent catastrophic global warming,gigantic investments are needed for a rapid transition toless carbon intensive energy consumption and production.

The International Energy Agency (IEA)estimates that until the year 2050 arecord amount of USD 36 trillion will benecessary over and beyond ‘business asusual’. The United NationsEnvironmental Programme (UN EP)notes that investments needed to adaptto already irreversible climate changeare even larger than this.

These amounts are investmentsyielding a return, they are not costs. Toprovide the necessary capital, it isparamount to activate the world’s

largest capital market, the USD 90 trillion debt market.Only through this broad and deep liquid market can (re-)financing for companies and financial institutions besecured, such that climate-friendly projects keep beingrealised. Climate bonds are a tool to access this capitalmarket for the fight against climate change.

Characteristics of climate bondsA climate bond is usually structured as a regular (grey)senior unsecured bond. With such grey bonds, asstipulated by loan documentation, proceeds are normallyused for general purposes. This is different for climatebonds. Here, proceeds are ear-marked: they can be usedonly or preferably for activities aiming to mitigate or adapt

to climate change. Sometimes, issuers even ring-fenceproceeds on a separate account to ensure that they arenot even temporarily used for anything but green projects.

Although ear-marking and ring-fencing are practicaland seemingly powerful tools, there is a point of criticism.The bond’s buyer’s exposure to credit risk and theconcomitant return stem from the whole company, notspecifically from the green projects only. This can include‘grey’ assets with which the responsible investor might notwant to be associated. A recent example is the climatebond issued by Electricité de France (EDF). Someresponsible investors are not enthusiastic about EDF, as thecompany produces nuclear energy – even though the greenprojects related to the climate bond are praiseworthy.

The climate bondsmarket in need ofstandards – maybe even a small range of them?

Manuel Adamini, Head Of ESG-Research/Responsible Investment, ACTIAM(formerly known as SNS Asset Management)

“ In order to preventcatastrophic globalwarming, giganticinvestments are neededfor a rapid transition toless carbon intensiveenergy consumptionand production ”

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ABS might offer a way out of this, with Toyota havingcome halfway in resolving the issue. Although the carmanufacturer is known for its hybrids, it also produces realgas guzzlers like the Land Cruiser. This could keepresponsible investors from buying climate bonds withexposure to Toyota’s less efficient part of its fleet. Thecompany created a special purpose vehicle as issuer of thebonds. The SPV carried a mixed-green pool of assetsrepresenting Toyota’s average fleet, while it was promisedthat proceeds would be used for consumer loans for veryfuel-efficient new cars only. One remains exposed to creditrisk of an average-shade of greenness of the assets, whilecontributing to further greening the fleet. Maybe with thenext ABS climate bond, we will see a set of loans for highly-efficient cars only as collateral…

The climate bonds marketThe development of the climate bonds market has beengoing on for some years now. The market evolved rapidlysince 2012/13, and now has a size of about USD 500billion. Over half of this amount is issued in US dollars, alittle under a third in Euros, and the remainder in othercurrencies. Almost half of the market is issued by partieswith a high credit rating (investment grade). Parties fromChina, the UK, US, and France dominate the market. Themajority of the proceeds are directed towards transport andlogistics projects (about USD 360 billion), especially railways.

Most of those bonds represent lending for generalcorporate purposes, where those purposes are consideredclimate-friendly by default. This is based on the pure-playgreen nature of the issuer. The section of bonds with ear-marked climate use of proceeds – often by issuers alsohaving non-eligible activities or projects in their business -is significantly smaller, with estimates hovering aroundUSD 35 billion. This is sometimes being referred to as‘labelled’ climate or green bonds. When the climate bondsmarket just started, it was driven by offers frommultilateral, regional or national development banks, likethe World Bank and its subsidiaries. Since 2013, more andmore commercial banks and corporations have startedissuing climate bonds.

Some of the projects proposed for climate bonds aredesigned to have a social impact over and beyond theenvironmental merits. This can cover areas around health,vulnerable groups, education, or social entrepreneurship.This tends to be more frequent with regional governmentagencies as issuers.

Our view on projectsClimate bonds can be used to finance projects in a varietyof sectors, such as energy, construction, transport andagriculture. Not all of these projects have an identical impact on climatechange, neither across nor within sectors. Research is currently conductedinto relative (net) impacts and possibleenvironmental and/or social side-effects.This will provide a basis for marketstandards or guidelines, helping the buy-side to make well-informed choices. Afterall, money that is spent on any one project cannot bedeployed for another – maybe environmentally evenfriendlier – activity. Funds spent are ‘locked-in’, as climate bonds are often long term commitments,especially those in infrastructure. The IEA has explicitlywarned against this risk.

Although we have not seen issuers trying to financeprojects with ambiguous or even negative climate benefitsat this point, the chances for such proposals to comeforward might grow as the market expands. A clearframework for buying and selling climate bonds wouldthus be useful. Until market guidelines are in place,investors have to review climate bonds on a case-by-casebasis. We would like to provide some thoughts here.

When it comes to locking-in, it is important to becritical about projects that intend to contribute to a betteruse of fossil energy. Because of the almost insatiableworld-wide energy demand, fossil fuels seem inevitable inthe transition to renewable energy use. Yet, climate bondsthat finance fossil energy projects should be subject tostrict stipulations. For example, the retrofitting of a fossil-fuel power plant should only be financed if carbon will be

“Since 2013, more andmore commercial banksand corporations havestarted issuing climatebonds ”

Figure 1: Thematic breakdown ofclimate-themed bond universe

Source: Bonds and Climate Change – The State of the Market in 2014, Prepared by Climate Bonds Initiative, Commissioned by HSBC

Transport$358.4bn

Energy$74.7bn

Finance$50.1bn

Buildings &Industry$13.5bn

Agriculture& Forestry$4.2bn

Waste & Pollution Control$1.4bn

Water$0.7bn

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Figure 2: Climate-themed bond issuance per year

captured and stored. This will prevent an instant negativeenvironmental impact, which gives us the opportunity toawait further technological developments to deal withcarbon. Likewise, when financing railways, as manyclimate bonds do, investors should examine which goodswill be transported. Transporting fossil fuels – such as coal– by train will probably not contribute much tosustainability, as opposed to transporting people or non-energy goods.

A similar reasoning goes for waste management(incineration or storage). Waste is for sure not part of a

sustainable future. Yet, the latent sourceof energy it entails should be utiliseduntil market forces solve our wasteproblem at its source. This is why weconsider incineration and storage ofnon-hazardous waste acceptable – ifand when tied to energy recycling andcomplying with the most stringentefficiency standards.

We are more reticent about usingnuclear power or shale gas in thetransition to a climate friendly economy.While nuclear seems interesting becauseof the avoidance of carbon emissions at

site, the energy intensity of mining nuclear fuels isconsiderable. Furthermore, no final solution to theproblem of handling, storing and decommissioningnuclear waste has yet been found. A comparablereasoning holds for shale gas, and its water intensiveproduction. This discussion is, we hope, hypothetical only,as we do not expect nuclear plants or shale gas to becovered in the climate bonds market.

Reliable and responsible issuers of climate bondsshould also measure (and report on) the side effects oftheir projects. The (re)building of dams, (test) drilling forgeothermal energy, agricultural activities and bio- andgene technology are all examples of activities that couldhave negative side effects. There are guidelines and ‘bestpractices’ for these topics that projects would have tocomply with – and issuers would have to report on.

Some projects deal with both locking-in as well aspossible negative side-effects, for example forestryprojects. Forests are natural carbon sinks. Storing CO2 this

way can be an appealing way to restore or protect theenvironment. This can however only be done properly ifthe forests are protected and managed well in the longterm. Rogue behaviour such as the logging of primaryforests in order to plant commercial ‘compensationforests’ can have strong negative net effects on theenvironment – as well as on local populations. Therefore,it is not preferable to include these projects in the climatebonds space. If they are, they would have to comply withrequirements like REDD+ Social & EnvironmentalStandards, FSC, Verified Carbon Standard, Gold Standard,or the Climate Community and Biodiversity Standards.

Our view on the market and market standardsIn order for climate bonds to really contribute tomitigation of or adaptation to climate change, the climatebonds market needs to be lasting and as broad and deepas possible. Investments should not bedependent on niche parties willing to take on higher risks or accept lowerreturns. Climate bonds should passregular tests for risk-adjusted returnscomparable to market benchmarks. Much to our content, recently issuedbonds satisfy these demands.

Parallel to this, the green integrity ofclimate bonds needs to be guaranteed.We are happy to be involved in the establishment ofproper market standards that will help ensure greenintegrity. We do this not only because of our ESG-expertiseand long-standing commitment to responsible investment.It is also enlightened self-interest, given our considerableclimate bonds exposure of over EUR 500 million.

To ensure the credibility of climate bonds and preventgreen-washing, we argue for the development of a marketstandard that:

• Is developed by relevant stakeholders in the climatebonds market, with a prominent role for the buy-sidelike asset owners and asset managers;

• Describes which activities and technologies are viablefor climate bonds and how issuers can be transparentand accountable;

Source: Bonds and Climate Change – The State of the Market in 2014, Prepared by Climate Bonds Initiative, Commissioned by HSBC

“Waste is for sure notpart of a sustainablefuture. Yet, the latentsource of energy itentails should beutilised until marketforces solve our waste problem at its source ”

“Climate bonds shouldpass regular tests forrisk-adjusted returnscomparable to marketbenchmarks ”

$100bn

$80bn

$60bn

$40bn

$20bn

$0bn2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Government Backed Not Government Backed

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• Makes possible independent third-party verification ofcompliance with broadly accepted norms;

• Functions, through certification, as a credible andefficient market standard.

An important step has been taken by theestablishment of the Green Bond Principles (GBP). Thesewere drafted by the sell-side and provide

recommendations about thetransparency and positioning of climatebonds. However, the content of thebonds is not discussed. This is achallenge, as purchasing investors haveto consider not only their ownreputation, but above all their fiduciaryduty. They need to ensure that thegreen products bought on behalf ofclients live up to their promises. Toassist the buy-side, the independentand not-for-profit Climate BondInitiative (CBI) was established. Wesupport its call for an independentclimate bond-label.

The CBI is currently working ontechnical standards per type of activity. Guidelines for realestate, transport, solar and wind have already beenestablished. These guidelines are developed by competenttechnicians and approved by CBI’s Industry Working Group.The latter is composed of a broad set of stakeholders,including ACTIAM and the author of this article, approvingof the technical guidelines proposed by expert groups.Based on expert standards, CBI evaluates issuers andassesses whether they meet the ‘green integrity’ criteria.When a bond is assessed positively by the CBI StandardsBoard, it awards the label ‘Climate Bond Standard’, helpingmarket players with their deal due diligence.

At this point, it is crucial for the CBI to have therelevant standards for the different types activities availablesoon. The CBI has to be ready to award its label, shouldissuers ask for it. After that, it is time for differentiation.There will be buyers, or issuers, that do seek a test by anindependent third party based on a broadly recognisedmarket standards, and who want this test to be proveneasily through a trusted label. Some of them, though,might consider CBI’s demands as being too strict.

CBI – or any other organisation of comparablecredibility and expertise - should thus consider setting up a(very limited) set of labels, ranging from very strict to more

moderate demands. Otherwise, it will risk pricing itself outof the market through stringency. The CBI can learn a thingor two from the carbon credit market, where differentstandards co-exist. There is an unregulated market; onewith verification of impact and use of proceeds; one wherelabels are being awarded; and one where a label is beingawarded based on the strictest of social and environmentalstandards. The latter, called the Gold Standard, wasdeveloped in cooperation with the World Wide Fund forNature (WWF), offering credibility and the protection ofreputation to issuers and buyers alike.

Conclusion Climate change is the single largest threat to futuregenerations. On the short term already, it can haveconsiderable negative effects on the global economy. Wemust therefore rapidly shape the transition to a moreclimate friendly economy, and at the same time adapt toirreversible climate change. This requires enormousinvestments, impossible without use of the large globalbonds market.

Recently, climate bonds have shown to be a goodmeans toward that end. The growth of this market isimpressive and encouraging. In order to steer that growthin the right direction, market players need to be criticaland thorough about the net added value of bondsoffered, with regard to people and nature in a broadersense. The aspects of locking-in as well as undesired side-effects are crucial.

To assist buyers in efficiently making well-informeddecisions, the development of market standards is pivotal.The Green Bond Principles serve issuing parties to betransparent. However, they do not touch upon the content of the bonds,i.e. their net contribution to protectingour planet. This gap is being addressedby the Climate Bond Initiative. It is crucialfor the CBI to now focus on establishingand publishing technical requirementsfor different projects and activities. At thesame time, CBI needs to keep an eye onwhat is important in the longer term. Itneeds to strike a balance betweenformulating an ambitious marketstandard and being attractive for mainstream marketplayers. A suggested solution is the development of arange of certifications. The carbon banking market canprovide us with valuable lessons learned.

Manuel Adamini joined ACTIAM as Head of ESG-Research/Responsible Investment in January 2008. He serves asInternational Board (Alternate) Member on behalf of the 80 member investor constituency of the Extractive IndustriesTransparency Initiative (EITI), chaired by the Rt Hon Clare Short, former Minister of the UK; as a Steering Committee Memberto the PRI Fixed Income Work Stream; and on the Climate Bonds Initiative’s Industry Working Group. Before joining ACTIAM,Manuel worked as Manager Corporate Social Responsibility at Fortis NV/SA. He initiated and implemented a climate changestrategy that rendered Fortis CO2 neutral on a global scope, let Fortis’s green banking and carbon banking business growsignificantly, and led to inclusion in the Carbon Disclosure Project’s Climate Leadership Index. Before joining Fortis, Manuelhad worked in the social sector in his home country Germany. He holds a MSc in Economics, graduate option InternationalManagement, having studied in Maastricht (the Netherlands), Aachen (Germany) and Montréal (Canada).

The author would like to thank Bank of America Merrill Lynch’s Suzanne Buchta for her comments on a previous versionof the text. The views expressed remain solely Manuel Adamini’s.

“purchasing investorshave to consider notonly their ownreputation, but aboveall their fiduciary duty.They need to ensurethat the green productsbought on behalf ofclients live up to theirpromises ”

“ It is crucial for the CBIto now focus onestablishing andpublishing technicalrequirements fordifferent projects andactivities ”

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The Green Bond Principles are voluntary processguidelines that recommend transparency anddisclosure – with the aim of promoting

integrity in the development of the green bondmarket by clarifying the issuance process. ThePrinciples are intended for broad use by the market.They provide issuers with guidance on the keycomponents involved in launching a credible greenbond and on the availability of third party assuranceto evaluate the environmental impact of theirrelated green investments and projects. They assistall participants by moving the market towardsstandard disclosures and reporting which willfacilitate transactions.

In excess of 55 institutions representing all participantsin the green bond market have now joined the Principles asmembers. Membership is open to institutions that haveissued, underwritten, placed or invested in a Green Bond.Observer status is designed to welcome organisations thatare not yet in the market and/or are active in the field ofgreen finance such as - but not limited to - NGOs,universities, auditors, and service providers (all applicationsshould be sent to [email protected]). As of theend of July 2014, 18 organisations have received observerstatus.

ICMA, the International Capital Market Association -runs the Secretariat. Its activities include responding tomembership and other queries; facilitating information

exchange among members and other stakeholders;gathering input for the annual update of the Principles; aswell as generally advising on governance and othermatters. ICMA also hosts the Principles’ website(www.icmagroup.org/greenbonds).

The governance arrangements on which ICMAprovided extensive prior advice were published in April2014. The constitution of the GBP Executive Committeewas launched shortly thereafter with a four weekapplication period in May 2014 during which 29organisations came forward.

This led to the Executive Committee being formed inJune 2014, with 18 organisations comprising a balanceddistribution between investors, issuers and underwriters.

Participation in the Committee reflects theorganisations’ activity in the green bond market, as well ascriteria such as transaction volume, diversity of type andgeographic balance. The organisations listed below arenow members of the Executive Committee.

The composition of the Executive Committee confirmsthe broad support that the Principles enjoy and provides asolid basis for their governance. The Executive Committeemet for the first time in London on 23 June 2014. Itspriority will be to oversee the update of the Principles thatwill be presented at the Annual General Meetingscheduled for early November 2014 in London. TheSecretariat has organised beforehand a wide consultationof members and observers.

GBP Executive Committee as of June 2014

Nicholas Pfaff, Secretary to the Green Bond Principles

The Green Bond Principles

Investors:• Blackrock, Inc.• California State Teachers’ Retirement

System (CalSTRS)• Natixis Asset Management / Mirova• Standish Mellon Asset Management

Company LLC• TIAA-CREF• Zurich Insurance Group

Issuers• EDF S.A.• European Investment Bank (EIB)• GDF SUEZ• International Finance Corporation

(IFC)• Unilever• World Bank

Underwriters• Bank of America Merrill Lynch• Citi• Credit Agricole CIB• HSBC• JPMorgan Chase & Co.• Skandinaviska Enskilda Banken AB

(SEB)

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Nicholas Pfaff runs the Secretariat of the Green Bond Principles. He is a Director in the Market Practice and Regulatory Policy team of theInternational Capital Markets Association (ICMA), and leads ICMA’s Paris office. He also coordinates a number of other ICMA initiatives suchas the Public Sector Issuer Forum and the Pan-European Private Placement Working Group. Nicholas is a senior banker with extensiveinternational experience in investment banking and capital markets, as well as in development banking. He has worked previously at BNPParibas, Goldman Sachs and the European Bank for Reconstruction and Development (EBRD).

GREEN BOND PRINCIPLESThe GBP recommend concrete process and disclosure for issuers whichinvestors, banks, investment banks, underwriters, placement agents and othersmay use to understand the characteristics of any given Green Bond. The GBPhave four components:1) Use of Proceeds 2) Process for Project Evaluation and Selection 3) Management of Proceeds 4) Reporting

1. Use of ProceedsThe cornerstone of a Green Bond is the utilization of the proceeds of the bond.For a Green Use of Proceeds Bond or a Green Use of Proceeds Revenue Bond,the issuer should declare the eligible Green Project categories (including typesof investments made indirectly through financial intermediaries) in the Use ofProceeds section of the legal documentation for the security. The GBPrecommend that all designated Green Project categories provide clearenvironmental benefits that can be described and, where feasible, quantifiedand/or assessed.There are several categories and sets of criteria defining eligible Green Projectsalready in existence in the market. Issuers and other stakeholders can refer toexamples in the Appendix.The GBP recognize several broad categories of potential eligible Green Projectsfor the Use of Proceeds including but not limited to:• Renewable energy• Energy efficiency (including efficient buildings)• Sustainable waste management• Sustainable land use (including sustainable forestry and agriculture)• Biodiversity conservation• Clean transportation• Clean water and/or drinking water

2. Process for Project Evaluation and SelectionThe issuer of a Green Bond should outline the investment decision-makingprocess it follows to determine the eligibility of an individual investment usingGreen Bond proceeds. Where applicable, the issuer should, as a first step,review the investments’ overall environmental profile. In all cases, the issuershould establish a well-defined process for determining how the investments fitwithin the eligible Green Project categories identified in the Use of Proceedsdisclosure.A process of review should determine and document an investment’s eligibilitywithin the issuers’ stated eligible Green Project categories. If possible, issuersshould work to establish impact objectives from the projects selected. To theextent feasible, issuers should consider direct and indirect impacts of GreenProjects, such as cases where investments lock-in a current level of emissionsinto the future.Multilateral and bilateral agencies and other International Finance Institutionshave established processes to ensure that environmental criteria are consideredfor each project to which they allocate funds, independent of whether theyqualify for use of Green Bond proceeds. These reviews are carried out withresident teams of environmental experts. The GBP recommend all issuers,where applicable, engage in similar environmental reviews of the projects theyare financing. In addition to the Green Bond process, criteria and assurancesthat an issuer provides, many Green Bond investors may also take intoconsideration an issuer's overall environmental and social and governanceframework.

3. Management of ProceedsThe net proceeds of Green Bonds should be moved to a sub-portfolio orotherwise tracked by the issuer and attested to by a formal internal process thatwill be linked to the issuer’s lending and investment operations for projects. Solong as the Green Bonds are outstanding, the balance of the tracked proceedsshould be periodically reduced by amounts matching investments made duringthat period. Pending such investments, it is recommended that the issuer makeknown to investors the intended types of eligible instruments for the balance ofunallocated proceeds.The management process to be followed by the issuer for tracking the proceedsshould be clearly and publicly disclosed. The environmental integrity of GreenBond instruments will be enhanced if an external auditor, or other third party,verifies the internal tracking method for the flow of funds from the Green Bondproceeds. Depending on issuers’ and investors’ expectations, outside review ofthe internal tracking method may or may not be necessary.

4. ReportingIn addition to reporting on the Use of Proceeds and the eligible investments forunallocated proceeds, issuers should report at least annually, if not semi-annually, via newsletters, website updates or filed financial reports on thespecific investments made from the Green Bond proceeds, detailing whereverpossible the specific project and the dollars invested in the project.The GBP recommend the use of quantitative and/or qualitative performanceindicators which measure, where feasible, the impact of the specificinvestments (e.g. reductions in greenhouse gas emissions, number of peopleprovided with access to clean power or clean water, or avoided vehicle milestravelled, etc.). While there is variability in impact measurement systems, muchprogress towards standardization has been made in the past several years.Issuers are recommended to familiarize themselves with impact reportingstandards and, where feasible, to report on the positive environmental impactof the investments funded by Green Bond proceeds.

ASSURANCEAttention will be paid to the accuracy and integrity of sustainability informationand data whose disclosure is recommended by the GBP and which will bereported by issuers to stakeholders and used for strategic decision making byinvestors. There are a variety of ways for issuers to obtain outside input to theformulation of their Green Bond offerings such that they address the issuesraised by the GBP. There are also several levels of independent assurance thatcan be provided to the market. Such guidance and assurance might include, inorder of increasing rigor:(i) Second party consultation: for example, an issuer (“first party”) can hire an

expert consultant (“second party”) with climate expertise to help in theestablishment of a Green Bond’s eligible Green Project categories. Theissuer may choose to keep the recommendations of the consultant private.

(ii) Publicly available reviews and audits: if an expert consultant or auditorand an issuer so choose, a consultant’s recommendations or an auditor’sevaluation may be put in the public domain by the issuer.

(iii) Third party, independent verification/certification: at the moment, at leastone or more standards intended for use by accredited third parties tocertify Green Bonds are in development. The GBP are supportive ofcertification of Green Bonds against fully developed and vetted standards.It is also the intention of the GBP to allow for third party evaluation/auditof conformance with the guidelines recommended herein. (Further reviewin 2014 will refine this intended use and related communications.)

Green Bond Principles, 2014 Voluntary Process Guidelines for Issuing Green Bonds January 13, 2014

(Extract from the Green Bond Principles - full version is available at www.icmagroup.org/greenbonds)

Bank (top 21) TOTAL 2014 ytd Q1 Q2 Q3 ytd

SEB 3,022,310,770 1,116,017,833 1,227,892,937 678,400,000CACIB 2,181,056,405 889,010,283 613,646,122 678,400,000DB 1,726,107,081 866,675,350 181,031,731 678,400,000BAML 1,428,505,500 764,259,667 539,245,833 125,000,000CITI 1,210,116,708 659,828,375 325,288,333 225,000,000HSBC 1,084,584,167 165,830,000 818,754,167 100,000,000MS 912,443,375 912,443,375 0 0JPM 794,000,469 304,029,733 234,962,500 255,008,236GS 769,854,167 297,391,667 172,462,500 300,000,000BARC 756,383,571 409,155,000 172,228,571 175,000,000RBC 694,693,433 199,845,100 369,848,333 125,000,000Natixis 601,708,333 0 601,708,333 0UNICGP 518,269,905 95,753,000 422,516,905 0Santander 505,389,583 103,643,750 401,745,833 0TD 452,050,000 452,050,000 0 0Nomura 371,357,935 0 371,357,935 0CS 358,550,000 129,266,667 229,283,333 0RBS 354,888,333 279,888,333 75,000,000 0BNPPAR 334,312,245 0 334,312,245 0Commerzbank 325,036,333 95,753,000 229,283,333 0Nordea 310,770,000 310,770,000 0 0

SEB 1,561,455,817

BAML 1,531,180,500

MS 1,366,395,083

CACIB 1,284,460,945

JPM 1,134,433,667

Citi 732,885,083

UNICGP 612,921,250

DZBK 437,971,250

Commerzbank 316,843,333

MIZUHO 316,843,333

Societe Generale 316,843,333

Nikko 295,836,260

RABO 291,868,333

NOMURA 280,515,970

Handelsbanken Capital Markets 176,751,550

DAIWA 147,361,500

LBBW 54,875,000

HSBC 29,170,911

Green Bond Underwriter League Tables 2014 (USD)Source: The Climate Bonds Initiative

SEB CACIB DB BAML CITI HSBC MS JPM GS BARC

4

3

3

2

2

1

1

0

1200

1000

800

600

400

200

0SEB MS

CACIB DBBA

MLCITI TD

BARCNord

ea JPM

SEB HSBCCACIB

Natixis

BAML

UNICGP

Santan

der

Nomura RBC

BNPPA

R

SEB BAML MS

CACIB JPM Citi

UNICGPDZBK

Commerz

bank

MIZUHO

Societe

Generale Nikk

oRABO

NOMURA

Billio

nsM

illion

s

2014 ytd Top 10 (USD)

1400

1200

1000

800

600

400

200

0

18001600140012001000800600400200

0

Milli

ons

Milli

ons

2014 Q2 Top 10 (USD)

2013 Underwriter Activity (USD)

Underlying data supporting the above graph (USD)

2014 Q1 Top 10 (USD)

OCTOBER 2014

51


OCTOBER 2014

52


Issuer Name Total Amount Issued S&P Issuer Moody’s Issue Date Category Assurance(USD equivalent), Rating* Issuer Rating* of First in thousands* Green Bond*

African Development 1,026,235.6 AAA Aaa 10/18/2013 Renewable Energy; 2nd party opinion from CICEROBank Recycling & Waste

Asian Development 510,244.4 AAA Aaa 4/15/2010 Renewable Energy;Bank Water & Wastewater

European Bank for 499,647.71 AAA Aaa 3/29/2011 Renewable Energy; 2nd party opinion from CICEROReconstruction & Energy Efficiency; Development Water & Wastewater;

Recycling & Waste

European Investment 6,338,068.7 AAA N/A 6/28/2007 Renewable Energy;Bank Energy Efficiency

Export Development 300,000 AAA N/A 1/30/2014 Resources & 2nd party opinion from CICEROCanada Environment

International Bank for 5,253,842.91 AAA Aaa 11/12/2008 Renewable Energy 2nd party opinion from CICEROReconstruction & Development

International Finance Corp 3,038,954.4 AAA Aaa 5/3/2012 Renewable Energy; 2nd party opinion from CICEROEnergy Efficiency

KFW 2,020,060 AAA N/A 7/22/2014 Renewable Energy Impact Assessment certified by ZSW 2nd party opinion from CICERO

Kommunalbanken AS 521,844.99 AAA Aaa 3/24/2011 Renewable Energy; 2nd party opinion from CICEROEnergy Efficiency

Nederlandse 680,135 AA+ N/A 7/3/2014 Water & Wastewater 2nd party opinion from CICEROWaterschapsbank NV

NRW Bank 339,896 AA- Aa1 11/28/2013 Renewable Energy; 2nd party opinion from CICEROEnergy Efficiency;Water & Wastewater

Toronto-Dominion Bank 453,432 AA- Aa1 4/2/2014 Sustainable Construction Annual funding certification – Ernst & Young

Electricite de France SA 1,899,840 A+ Aa3 11/27/2013 Renewable Energy Annual funding certification – Deloitte2nd party opinion from Vigeo

Export-Import Bank 500,000 A+ N/A 2/27/2013 Renewable Energy; 2nd party opinion from CICEROof Korea Energy Efficiency; Water

& Wastewater;Recycling & Waste

Unilever PLC 414,200 A+ A1 3/26/2014 Resources & Environment; Annual funding certification – DNV GL Water & Wastewater Toyota2nd party opinion from DNV GL

GDF Suez 3,427,370 A A1 5/19/2014 Renewable Energy; Annual funding certification – GDFEnergy Efficiency auditors2nd party opinion from Vigeo

Unibail-Rodamco SE 1,025,360 A WR 2/26/2014 Resources & Environment Annual funding certification – Ernst & Young 2nd party opinion from Vigeo

Bank of America Corp 500,000 A- Baa2 11/21/2013 Renewable Energy; Annual funding certification – PWCEnergy Efficiency

Hera SpA 679,633 BBB Baa1 7/4/2014 Resources & Environment; Annual funding certification – “independent Recycling &Waste third party.” 2nd party opinion from DNV GL

Iberdrola International BV 1,036,770 BBB N/A 4/24/2014 Renewable Energy Annual funding certification – to be included in annual GRI reporting2nd party opinion from Vigeo

Regency Centers LP 250,000 BBB N/A 5/16/2014 Sustainable Construction Annual funding certification – PWCLEED standard projects, LEED is 3rd party verified Green Building Standard

Vornado Realty LP 450,000 BBB N/A 6/16/2014 Energy Efficiency; Annual funding certification –Sustainable Construction “an independent accountant....”

NRG Yield Operating LLC 500,000 (P)BB+ N/A 8/5/2014 Renewable Energy Annual funding certification –“independent public accounting firm”

Anstock II Ltd 300,000 N/A N/A 7/24/2014 Sustainable Construction;Recycling & Waste

* Sources: Bloomberg and BofAML internal databases

Largest green bond issuersGreen bond issuers who have issued $250 million + in aggregate.Listed alphabetically by credit rating. Sources: Bloomberg and BofAML internal databases

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